Thames Water has been spared a hefty fine by the industry regulator Ofwat despite missing its targets on leaks for four years in a row and being roundly condemned for failing to repair damaged and leaky pipes.

In a decision that will spark outrage among consumer groups, Ofwat told the highly profitable water utility that it must spend a further £150 million on cutting leaks and securing water supplies for its 8 million customers.

The regulator, which has already described Thames Water's performance as "unacceptable", could have fined the company up to 10 per cent of its turnover, equivalent to roughly £66 million.

Thames Water, currently seeking a drought order that will restrict water usage for its customers, caused an uproar last month when it emerged that it was losing 894 million litres of water every day. This is 34 million litres above regulatory guidelines and enough to fill 344 Olympic-sized swimming pools daily.

On the same day, the Reading-based firm, owned by RWE of Germany, posted a 31 per cent surge in annual profits to £346.5 million last year.

The company was heavily criticised by the Consumer Council for Water and Opposition politicians in the London Assembly. The furore grew after it emerged later that the board was planning to award itself big bonuses for the latest financial year.

Ofwat again branded Thames Water failures "unacceptable" today and threatened the company with a fine next year if it did not take appropriate measures to replace leaking water mains.

Philip Fletcher, the chairman of Ofwat, said: "Thames Water's failure on leakage is unacceptable. Our job as regulator is to protect customers, who have been outraged by Thames' inability to control leakage sufficiently in London.

"Thames has bound itself to spend an extra £150 million, at the cost of its own shareholders, to replace more ageing pipes than planned.

"It is more than double the maximum possible fine which the regulator could have imposed. A fine would not have gone to protect customers, but to the Exchequer. This is the right answer for Thames' customers and for London."

In response today, Jeremy Pelczer, managing director of Thames Water Utilities, said: "We recognise the widespread public concern that Thames Water did not meet its overall leakage target for 2005/06.

"Despite meeting our leakage target outside London, leakage in the capital remains unacceptably high, and we acknowledge that more work needs to be done to continue to reduce it.

"The most effective and sustainable way to bring leakage down in London is to replace the Victorian mains network. This is why we undertook 20 per cent more work putting new pipes in the ground in 2005/6 than was originally planned.

Mr Pelczer said Thames has already commited to replace the first 1,000 miles of the capital’s mains one year ahead of schedule in 2009.

He added that: "In addition to the £1 billion we are already committed to spend on leakage reduction in this regulatory period (2005-2010), the extra investment of £150 million announced by Ofwat today will be funded by shareholders and will accelerate our Victorian Mains Replacement programme, to complete at least an additional 230 miles of new mains by 2010."

Alan Tattersall, Director of Home Services at uSwitch.com, the online price comparison service, said of the extra investment: "Thames Water’s move to invest an additional £150 million to reduce leaks and to ensure the security of supply is a positive step – and hopefully consumers should reap the benefits in the form of lower water bills.

"However, the Ofwat investigation should be a warning sign to Thames Water and other water companies to improve its efficiency in the supply of water to customers. We would call on Ofwat to keep a close eye on the progress of these improvements to ensure they are carried out effectively and quickly."

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