Thames Water today escaped a fine for failing to meet its leakage target. Instead the country's biggest water supplier, which loses 894 million litres a day, must spend an extra £150 million on improvements, watchdog Ofwat said.
The industry regulator said a fine would have gone to the Exchequer rather than protecting customers.
Thames Water must spend the extra £150 million by March 2010 on replacing at least 368km of mains pipes.
The company's shareholders will foot the bill under the terms of the agreement, Ofwat said.
The maximum fine which the regulator could have imposed was £66 million - 10% of the company's £660 million water service turnover.
Thames Water missed its leakage target for 2005-2006 by 34 million litres per day, allowing 894 million litres per day to escape.
Despite this failure, the company last month announced a 31% increase in pre-tax profits which boosted its total to £346.5 million.
That increase provoked an outcry from customers because it followed Thames Water's application for a drought order which would further restrict customers' water use in London.
Ofwat chairman Philip Fletcher described Thames Water's legally binding agreement to spend the extra money as "restorative justice".
He said: "The reality is they have failed in their duty. We have extricated this undertaking from them which imposes a considerable burden on the company. I think it is proportionate to their failure on leakage."
Thames Water has admitted failing to meet its leakage targets but does not admit any breach of its statutory obligations.
The company, which is owned by German utility giant RWE, has not met its leakage target since 1999-2000, blaming the huge task of replacing pipes which date back to the Victorian era.
It has already pledged to replace 1,235km of pipes in London by 2010.
Ofwat will consider fining Thames Water if it fails to meet its target again next year.
The regulator today announced new, more relaxed leakage targets for the company for the coming years.
In 2006-07 Thames Water must limit leakage to 840 million litres per day, (originally 805 million litres per day).
Its target for 2007-08 is now 785 million litres per day (originally 770 million litres per day).
It must cut leakage to the original target of 745 million litres per day by 2008-09, reducing it further to 720 million litres per day by 2009-10 (originally 725 million litres per day).
The Ofwat announcement comes after company accounts revealed that five directors at Thames Water were in line for cash bonuses of £226,013 for reaching targets on "personal" and financial performance.
Former managing director Werner Bottcher received the largest cash bonus of £93,843.
Liberal Democrat environment spokesman Chris Huhne said: "Ofwat is playing patsy again. Thames Water has pushed the water rate through the roof while its service has gone through the floor. It deserves a firm whack to its profits as
well as a mandatory rise in investment.
"If Ofwat lets Thames Water get away with this, every other water company is going to be queuing up to take advantage of its customers in the same outrageous manner."
Thames Water managing director Jeremy Pelczer 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% more work putting new pipes in the ground in 2005-06 than was originally planned."
Parent company RWE is currently trying to sell Thames Water.
The Consumer Council for Water welcomed the Ofwat decision to demand improved services rather than a "punitive fine".
It asked the company to deliver "rapid and recognisable" improvements or a rebate to customers who faced an average 20% bill increase last year, which the council said customers were told would pay for reducing leakage.
Dame Yve Buckland, chair of the council, said: "Thames took consumers' money without delivering on their promises.
"It is only right that they should give back what they owe to their customers, and this is what we have been pushing for.
"However, this is better returned in the lasting form of improved services, rather than a financial penalty on the company which would simply swell the Treasury's coffers without directly benefiting consumers."
She added that Thames's performance on leakage had worsened the current water shortages and while consumers were being asked to reduce their use of water, the company must fulfil "its half of the bargain".
"Thames has been in danger of eroding the consumer confidence and goodwill that it will need from consumers when asking them to save water this summer.
"We hope that Ofwat's action will now concentrate their minds on delivering secure supplies of water and value for money to customers.
"We will keep a very close watch on the company's progress as they deliver on today's legally binding agreement.
"We look to Ofwat to act quickly in the future should Thames slip in its progress towards delivering the agreed improvements."Reuse content