Ofwat wants households to eventually be able to choose their water supplier in the same way they choose gas, electricity and phone providers.

It says competition would lead to lower prices, better customer service and new initiatives to address climate change and other environmental issues.

It is recommending a "step-by-step" shift to competition, allowing companies to prove customers will benefit from a new market.

Ofwat chief executive Regina Finn said: "We want to achieve an efficient and innovative sector which is able to respond to the challenges facing it, such as climate change, rising consumer expectations and growing population in water-scarce areas. Competition can help deliver that.

"The current scope for competition in the water and sewerage sectors is severely limited by legislation, is confined to a small number of business customers and has not developed successfully.

"We propose that more of the market is opened progressively, starting with all business customers. In time households could be able to choose their water supplier, when the market is ready and safeguards are in place. Competition will drive benefits such as greater responsiveness to customers' needs, innovative approaches to adapting to climate change and downward pressure on costs.

"Competition can also help respond to the environmental challenge of water scarcity, which the Government highlighted in its water strategy. Markets could spur innovation in developing and making better use of water resources and more water efficiency services, supporting sustainable water abstraction.

"As markets develop, we will look for opportunities to withdraw regulation. We will continue to robustly challenge companies on price and service delivery until competition is strong enough to protect consumers."

Ofwat said not one of the 2,200 eligible business customers had switched supplier in more than two years, suggesting current competition provisions were not working.