Committee chairman Edward Leigh lambasted the regulator for its "passive regulation of the water industry".
"Nowhere is its limp attitude towards the industry demonstrated more clearly than in the case of the serious wastage of water by Thames Water," he said.
"Thames missed its annual leakage targets for six years in a row without so much as a slap on the wrist. In future, such a wanton waste of water by a company must be rewarded with the maximum possible fine."
Ofwat could have fined Thames Water 10% of its turnover last year - £66.4 million -for missing its leakage targets. Instead it accepted the company’s offer to increase spending on its mains replacement programme by £150 million, at no cost to customers.
The report warns that by failing to impose a fine, Ofwat "risks sending a message to the industry that it will not readily use sanctions where appropriate". But it is somewhat behind the times since the regulator proposed fining United Utilities £8.9 million (0.7% of turnover) in April. The proposal relates to the company breaching conditions on transfer pricing in its licence when trading with companies in the same group.
MPs also want Ofwat to strengthen its oversight of water companies’ performance on water efficiency. In particular, the report criticises the regulator’s lack of data on the effectiveness of companies’ water efficiency schemes. The industry told the inquiry that the regulator’s efforts to encourage water efficiency are "confusing".
The report says Ofwat should require companies to use consistent methods to measure customers’ consumption because the figures are the basis for estimating leakage rates. There are large differences in estimates of per capita use between companies in nearby areas. For instance, Tendring Hundred has cited 124 litres per person per day and Three Valleys 177 litres.
The committee also found discrepancies between water companies’ assumptions about metered and unmetered consumption. South East Water, for example, estimates metered and unmetered households use similar amounts of water, but Sutton and East Surrey assumes unmetered customers use 32% more.
Some 60% of variation in per capita consumption figures can be explained by socio-economic and climatic factors, according to a UK Water Industry Research report mentioned by the inquiry. This leaves some 40% of the variation unexplained - a point which Ofwat has never followed up.
Water UK said the report was "one-sided and misleading" in its "exaggerated criticism" of Ofwat.