Water bills must go down by an average of £50 in England and Wales over the next five years, the regulator has said.
Ofwat has told water companies to cut the average bill by 12% before inflation as part of its price review, conducted every five years.
It has also told them to upgrade and improve services.
The specific reduction will depend on which company a homeowner is with.
Northumbrian Water customers will see an average fall of 26%, while Hafren Dyfrdwy customers will see a reduction of about 3%.
The decision is part of Ofwat’s approval of a £51bn investment plan for water companies.
The regulator demanded that leaks are cut by 16% to transform the industry and improve efficiency as part of a £6bn cost-cutting exercise.
The changes includes £13bn for “new and improved services that go above and beyond water companies’ day-to-day operations” with £1bn to cut the impact of flooding.
Companies will also commit to zero net carbon emissions by 2030, and to reduce leaks by 16% by 2025.
A new reservoir will be built in Hampshire and a pipeline will connect water supplies from North Lincolnshire to Essex.
The framework will come into effect on 1 April 2020.
Ofwat chief executive Rachel Fletcher told the BBC: “It is a really good package that we are announcing today, with massive investment to improve services and the environment for the future – in fact probably the greenest settlement we have ever put in place.”
It comes as Bedford residents have found themselves without water for three days due to a broken value in Leighton Buzzard.
Service resumed for many people on Sunday afternoon but Anglian Water gave itself a deadline of midday on Monday to restore the remaining affected homes.
On the Bedfordshire issue, Ms Fletcher said: “Things will go wrong from time to time and, frankly, what’s important when that happens is that companies get on it and address the issue quickly, that they support customers during outages like we have seen in Leighton Buzzard.
“We are pressing companies to do better. They will face penalties if they have interruptions, they will face penalties, frankly, if customers are not happy with the service that they are getting.”
Tony Smith, chief executive of the Consumer Council for Water, said: “Most customers will see this as a good deal but more must be done to make sure everyone can afford their bill and ensure there is sufficient investment in safeguarding these essential services long into the future.”