Regulator Ofwat has never enfoced such a fine before

Ofwat is considering the penalty - the first of its kind - after the firm "repeatedly breached its licence" for failure to "market check".

Market checking ensures a firm assesses the services it uses are the best value for money, so that customers pay no more than necessary.

United Utilities has vowed to ensure all its transactions meet Ofwat rules.

The firm said it was already making "significant progress" to address Ofwat's concerns by competitively tendering relevant services.

Protecting customers

Under its licence United Utilities Water is obliged to "market test for services that it procures from companies within the United Utilities group".

Philip Fletcher, Ofwat Chairman, said: "Our job as regulator is to protect customers by ensuring they pay the minimum necessary for high quality sustainable water services".

"This depends on Ofwat being able to measure accurately companies' costs when it sets price limits."

Ofwat's proposed fine - which is under consultation - relates to breaches between October 2005 and March 2007.