Ofwat has announced plans to persuade utilities to transfer more water to dry regions as part of proposals that will change the way it regulates the sector.
Despite four of the top five wettest years occurring since 2000, many parts of England have just experienced the driest 18 months for more than 100 years.
The regulator said it aims to introduce incentives to transfer water across company and regional boundaries from where it is plentiful, such as the north, to where it is more scarce. Currently only 4-5% of water in the UK is traded - a figure that has remained fairly static since the sector's privatisation in 1989.
Ofwat chief executive Regina Finn said the move is needed to address a growing population and increasingly volatile weather.
She said: "We are living in tough economic times, and household budgets are under increasing pressure. At the same time, it is getting ever harder to manage our precious water supplies as the population grows in areas where resources are already stretched, and our weather becomes more unpredictable.
"We cannot afford to stand still. We are changing our approach to help ensure we have modern, innovative, customer-focused sectors ready to meet 21st century challenges."
The move is part of a package of proposals that follow a two-year consultation with the sector, which will come into effect in 2015 alongside the latest price review for the industry. These proposals also include new penalties for companies that abstract water from environmentally sensitive sites. According to Ofwat, half of the UK's rivers are currently having unsustainable amounts of water taken from them.
Ms Finn continued: "We are acutely aware that households won't want to see any increase in bills that is not absolutely necessary. These changes will empower companies to rise to that challenge."
To support this goal Ofwat plans to change the way it sets price limits for the sector. In the past the regulator has set general price controls for each company over a five-year period.
From 2015 it plans to set separate price controls over the same period for businesses and household customers of retail water and sewerage services. Wholesale prices for water and sewerage services will also be subject to separate controls for the first time.