Paterson said water companies must use record profits generated through lower financing costs, brought about by the economic downturn, to help customers by lowering bills or increasing investment.
Last week Jonson Cox, the chairman of regulator Ofwat, sent a letter to water company chairmen urging them to lower customer bills and Paterson said he “applauded this”.
According to Paterson, “there needs to be a fair balance of risks and rewards between companies and their customers”.
Paterson said he welcomed “the positive response” the industry had made in rising to Ofwat’s challenge to absorb additional costs while investing in services for customers.
Companies are in the process of deciding whether or not they will implement the full price increases for next year which were allowed by Ofwat in the 2009 price review.
Paterson said: “In considering this choice about price rises at a time when many households are feeling the pinch, I know that you will be fully alive to concerns about the public perception of the industry.”
The environment secretary also said he expected the industry to “up its game” on tackling bad debt and that he wanted more water companies to offer consumers social tariffs.
A spokesperson for trade association Water UK said: “We can assure the Secretary of State that water companies are in touch with their customers and are well aware of the points that he makes.
“Water companies are continuing to make significant efforts to help hard-pressed customers with a wide range of measures to reduce their bills.”
Paterson said that the water industry had been “one of the greatest success stories of privatisation”.
“It is important that customers remain at the heart of each company’s business, and we fully support Ofwat’s drive to ensure no water company takes it customers for granted,” he added.