Ian Byatt, the director general of water services, warned that such a move could increase water bills significantly. He also voiced doubts about giving customers the universal right to have water meters installed free of charge.
In his response to the consultation paper on water charging from Michael Meacher, the environment minister, Mr Byatt said: "Ofwat believes that the threat of disconnection is important. Without it, some customers may decide they do not need to pay. Rising levels of uncollected accounts will lead to pressure for high bills for water customers as a whole."
His comments were welcomed by the water industry. Pamela Taylor, chief executive of Water UK, said that Mr Byatt had "hit the nail on the head".
According to a survey by the organisation, which represents water companies in England and Wales, the level of bad debts could rise by 300 per cent if water companies were prevented from disconnecting customers for non- payment. Bad debts are currently running at about pounds 90m a year, or 1.5 per cent of turnover.
Ofwat's latest figures show that the number of customers disconnected for non-payment fell sharply last year for the sixth year running. In 1997-98 disconnections fell to 1,907 - a drop of 39 per cent on the 3,148 recorded in 1996-97.
Mr Byatt said that demonstrated that the water companies were getting better in their ability to differentiate between customers who were unwilling to pay their bills and those who were unable to do so.
He said there was a need to strike a fair balance between meeting the needs of vulnerable customers and ensuring sensible and sustainable water usage.