Homeowners could eventually choose their water supplier under proposals by Ofwat, the industry regulator.

In the second part of its review into the sector, Ofwat calls for the water and sewerage markets to be opened up progressively, starting with small business customers and extending to households.

Pressure on water resources and a growing awareness of the need to tackle climate change are the main factors behind the recommendations. However, Ofwat says it will only proceed if it can develop a system that is in the interests of consumers.

Regina Finn, the regulator’s chief executive, said that the current regime was not working. “Competition will drive benefits such as greater responsiveness to customers’ needs, innovative approaches to adapting to climate change and downward pressure on costs.”

Ms Finn added: “Competition can also help respond to the environmental challenge of water scarcity, which the Government highlighted in its water strategy.”

Large water users, such as hospitals and industrial plants, have been able to switch suppliers for more than two years. However, not one of the 2,200 eligible businesses have switched in that time.

At present, in England and Wales, water and sewerage companies operate local monopolies, using their own water resources - including rivers and reservoirs - to provide water and sewerage for the businesses and homes in their area.

It is thought that by compelling water companies to show how much it costs to transport, treat and supply water, it will encourage greater price competition between suppliers.

Eventually this will develop competitive retail services markets, similar to those which already occur in the energy and telecoms markets. Another priority is to tackle barriers which prevent competing suppliers from tapping rivals’ upstream water resources.

The Consumer Council for Water agrees with Ofwat that there is room to improve competition in the water industry, but said that it wanted to see competition working for business customers, before being extended to domestic customers.

Sir James Perowne, Chair of the Consumer Council for Water Central and Eastern, said: "Competition to date has not served business customers well. Business customers have told us that they want to be able to choose their water supplier, but are frustrated at the lack of progress."

Scotland’s water market opened up to competition in April, ending Scottish Water’s monopoly. Some 100,000 Scots businesses and public bodies can now choose their water supplier.

The newly branded business arm of Scottish Water, Business Stream, now faces tough competition from a string of rivals looking to steal its market share.

AWG, the owner of Anglian Water, Severn Trent, United Utilities, Kelda and Thames Water, are among the water companies expected to be interested in competing for customers as markets develop.

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