The dispute involves moves by one of the UK's largest paper producers, Shotton Paper from South Wales, to switch from Welsh Water to a new supplier. Shotton, which is owned by a Finnish paper group, pays about pounds 2m to Welsh Water for its water supply with sewerage costs on top. The company, which claims to be Britain's biggest manufacturer of newsprint, has argued these charges are excessive.
A London-based consultancy company, called Enviro-Logic, has said it can slash Shotton's bills by exploiting a little-known provision in the Water Act. The move, known as an inset appointment, involves a paper transaction in which Enviro-Logic buys existing supplies and services from Welsh Water at wholesale prices determined with agreement from Ofwat. The process is the only current option open to large industrial groups which want to change their water provider.
However, Welsh Water is thought to have responded by offering to cut its own charges to Shotton. Dr Jeremy Bryan, Enviro-Logic's managing director, said he believed Welsh Water had gone even further, by pledging to undercut any price put forward by the consultancy group. He said the move amounted to abuse of its monopoly powers.
"Welsh Water are doing this in the full knowledge that they are pricing a competitor out of the market. That seems to me to be a clear breach of their operating licence," Dr Byan said.
Ofwat confirmed it was investigating the claims. Welsh Water declined to comment on details of its pricing policy. However, a spokesman said: "The ball is now back in the court of Shotton Paper. We have put a fair price to Ofwat."
Chris Robinson, Shotton's finance director, said Ofwat had recently submitted provisional findings on the pricing proposals. "Clearly we are seeking to get the best possible price for our water. But we're still not satisfied. The process has been dragging on for far too long."
The row is another sign of growing frustration in the industry with Ofwat's progress on the issue of water competition. So far Enviro-Logic has submitted 15 bids to the regulator to take over services for companies which use large quantities of water, including plants run by brewers Guinness and Bass.
Yet almost six years after privatisation, Ofwat has sanctioned only one inset appointment, which involved Anglian Water taking over supplies to a Buxted chicken plant.
Ian Byatt, the regulator, has previously said he supported the principle of inset appointments but was unhappy with the legislation, which appeared to give new suppliers an open-ended supply commitment. He is thought to want to limit new supply contracts to a period of no more than five years.