Thames Water has backed down from the water industry rebellion against the regulator by accepting Ofwat’s toughest crackdown on profits.

The UK’s largest water supplier gave “careful consideration” to joining the industry’s first rebellion against Ofwat, in which three major water utilities plan to challenge the regulator.

Anglian Water and Northumbrian Water have followed the lead of Yorkshire Water, which earlier this week became the first major water utility to call for the competition watchdog to intervene in the spat over profits.

The Thames Water board met to discuss whether to refer their own price regulation to the Competition and Markets Authority (CMA) before deciding that the process could lead to “significant management distraction” while it works to improve its service.

Thames has weathered multiple run-ins with the regulator in recent years over its poor record on tackling leaks and pollution. In the past the utility was accused of profiteering from its customers by paying out rich dividends to investors and virtually no tax.

“It was deemed to be in the best interests of both customers and employees to accept the final determination, to ensure certainty in the months and years ahead, and to move forward positively and constructively,” the company said.

Ofwat sets the price controls every five years to decide how much money people should pay for their water and the level of service they should receive. This also determines how much profit utilities can make for their investors and shareholders.

The dissenting firms claim Ofwat’s price review could damage long-term investment in the sector by forcing companies to observe tougher industry targets while cutting spending and water bills.

The plans could also lead to underinvestment in the UK’s water system, which would pose a risk to customers and the environment, the companies have said.

The CMA said it expects to take six months to rule on whether the price controls were fair but the inquiry could take longer.

Kip Meek, the chair of the inquiry, said: “Everyone needs water, so it’s really important that customers’ bills are not set too high, but at the same time the water companies have enough money to deliver an efficient and high-quality service. The CMA will look closely at whether Ofwat’s decision strikes the right balance in this and other areas and will make changes if not.”

Last year Ofwat called for all water companies in England and Wales to cut bills for customers by £50 over the next five years, while spending £51bn on improving services and infrastructure. The industry had hoped to spend £56bn to meet the new performance targets, which include plugging leaks and guarding against pollution, but this could risk higher bills for households.

All other water companies have accepted the tough new Ofwat standards, including the listed water giants United Utilities and Severn Trent, plus Pennon’s South West Water.

Rachel Fletcher, Ofwat’s chief executive, said: “Some investors have accepted this scale of ambition and change but others need to face up to the new reality.

“We are ready to fully engage with the CMA, setting out our analysis and why we are confident this is the right settlement for customers, the environment and companies.”