Ofwat said there are too many instances where customers feel let down and their supplier does not have their best interests at heart.
The chief executive of the watchdog, David Black, said: “From today we are putting water companies on notice to improve customer service and where we see failure, Ofwat can and will take action which could result in significant fines.”
The organisation has been introducing new measures designed to protect consumers and the environment.
It already has the power to block companies paying out money to shareholders if they fail to meet performance standards, and can impose fines.
Ofwat said it thinks being able to dish out penalties to suppliers not treating customers fairly, triggered by a new licence requirement, will “deliver real improvements in customer service across the sector”.
“It is in the companies’ interests to put customers at the heart of their business and provide levels of service that increase customer satisfaction,” Mr Black added.