Water bills in England and Wales are set to fall by an average of £50 between 2020 and 2025, under plans published by the industry regulator.
Ofwat said firms would also have to invest an additional £6m each day in improving services for customers.
It comes amid widespread dissatisfaction with the performance of many water companies.
Ofwat said the measures would mean “better services, a healthier natural environment and lower bills”.
“[Water companies] will be accountable not just for reporting against their performance but they’ll face tough penalties if they don’t achieve those targets,” Ofwat boss Rachel Fletcher told the BBC’s Today programme.
Ofwat said the bill reductions would vary widely – falling by £7 at Hafren Dyfrdwy to £110 at Northumbrian Water compared with 2017-18 prices.
It comes after only three out of 17 water firms in England and Wales passed the last review by Ofwat, published in January.
All firms submitted plans to cut bills over the 2020-25 period, while reducing leaks and helping vulnerable customers. But only plans from Severn Trent, United Utilities and South West Water were approved.
There have also been continued problems with leaks – particularly after extreme weather events such as last year’s Beast from the East icy spell.
While leaks in England and Wales are much lower than they were in the mid-1990s, progress in tackling them has slowed to a crawl since 2001.
Firms will now have to invest more in tackling leaks between 2020 and 2025, saving an amount of water equivalent to the needs of the population of Manchester, Leeds, Leicester and Cardiff.
They will also have to:
- Reduce supply interruptions by almost two-thirds,
- Cut pollution incidents
- Reduce the number of customers with low water pressure
- Help some 1.5 million customers who are struggling to pay.
Ofwat said this would add up to £12bn of new investment – over and above business-as-usual costs – or £6m per day over the period.
Water companies will be able to make representations about the proposals and the final deals will be confirmed in December.
Tony Smith, chief executive of the Consumer Council for Water, called the plans “good news”, but added: “Not everyone will see their bills fall when you add inflation and customers need to be told how much Ofwat’s financial rewards for companies could hit them in the pocket.
“Only about half of the three million households who struggle to afford their water bills will receive financial assistance under these plans,” he added.