The failure of the water regulator in tackling the sewage scandal and spiralling bills could see it abolished as part of a large-scale review of the sector.
A new independent Water Commission will have no limits to its potential recommendations and could include the complete reform of Ofwat and how it interacts with other watchdogs, such as the Environment Agency, the Government said.
The review is designed to tackle the systemic problems which led to sewage commonly being pumped into Britain's rivers, lakes and seas, while company bosses continued to take home huge bonuses.
It comes as firms asked for bills to be hiked, with the beleaguered Thames Water wanting a 53 per cent increase and Southern Water requesting a massive 84 per cent.
The latest requests would see the average tariff for customers in England and Wales rise by about 40 per cent between now and 2030.
Firms applied to the regulator Ofwat to increase tariffs so they can upgrade networks and systems, often after years of underinvestment.Thames Water, the UK's largest provider, is in emergency talks over its £15billion debt pile and a worsening financial situation.
Environment Secretary Steve Reed said: "Our waterways are polluted and our water system urgently needs fixing.
"That is why today we have launched a Water Commission to attract the investment we need to clean up our waterways and rebuild our broken water infrastructure.
"The commission's findings will help shape new legislation to reform the water sector so it properly serves the interests of customers and the environment."
The review is the largest of the sector since it was privatised in 1989 and the commission will be chaired by former deputy governor of the Bank of England Sir Jon Cunliffe.
Sir Jon said: "Working over many years in the public sector, in environment, transport and the Treasury, and the Bank of England, I have seen how the regulation of private firms can be fundamental to incentivising performance and innovation, securing resilience and delivering public policy objectives."Ministers say the recommendations, due in the second quarter of next year, will form the basis of further legislation to attract long-term investment and clean up the country's polluted waterways and coasts.
The commission will assemble a panel of experts to help guide its recommendations, from the regulatory, environment, health, engineering, customer, investor and economic sectors.
The panel will not include representatives from the privatised water companies, but the commission will engage with the industry.
David Black, chief executive at Ofwat said: "We welcome the Water Commission's review and look forward to being able to work with the Government on the change that is needed to drive better outcomes for customers and the environment.
"We are ready to back record investment, the challenge for water companies is to match that investment with the changes in company culture and performance that are essential to rebuilding the trust of customers and the public."
The launch of the commission follows the introduction of legislation to bring criminal charges against water executives and a ban on bonuses for repeated illegal sewage dumping, the Environment Department (Defra) said.
But campaigners who want to see the water sector renationalised criticised the review for continuing with privatisation.
Matthew Topham, lead campaigner at We Own It, said: "The review is deaf to the calls of the public, anti-sewage groups and the international community to wrestle with the root cause of the sewage crisis: privatisation.
"Without serious thought, this Labour government will be remembered for its re-privatisation of England's water system - repeating a failed experiment which has been studiously avoided the world over."
