Following an investigation by Ofwat, the company has agreed to pay £65m in compensation to its 15 million customers, as well as £55m in automatic penalties incurred for missing its customer commitment to tackle leaks.
Ofwat's investigation found that Thames Water breached two of its legal obligations through poor leakage management.
The water regulator concluded that Thames Water's Board and management "did not pay enough attention to reducing leakage" and the company "underestimated the significance of its underperformance on leakage when assuring Ofwat that it was meeting its statutory obligations".
Ofwat Chief Executive, Rachel Fletcher, said: "Thames Water failed its customers in tackling leakage and the measures we've announced today illustrate the scale of the company's shortcomings and how seriously we take them.
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"High leakage creates unnecessary strain on the environment, excess costs for customers and increased risk of water shortages. A well-run water company will have a good understanding of the condition of its pipes and will be able to reduce leakage over time. Ofwat has set all water companies a target of bringing down leakage by at least another 15% up to 2025 and expects further reductions beyond this date.
"Thames has assured us that they now have a grip on the leakage situation, but this should serve as a catalyst for the company to improve how it delivers on its wider commitments to customers.
"Customers don't want to see their water company letting them down like this, but we hope the rebate they will now receive goes some way towards compensating them for their water company's failure to live up to its commitments to cut leakage."
Thames Water Chief Executive Officer, Steve Robertson, said: "Reducing leakage is really important to us and to our customers. We met our leakage targets for a decade but our recent performance has not been good enough.
"We let our customers down and for that we're sorry. We have taken more control of how we manage the network and are investing significantly more in people and resources to tackle leakage, get back on track and then go beyond."
(LM)
