Thames Water will have to pay an £18.2m penalty after the water industry regulator confirmed the troubled utilities company had breached dividend rules.

The Guardian revealed on Wednesday that Thames would be penalised over two dividend payments, made in 2023 and 2024, and that it would allow the water company to increase bills by just over a third. The industry watchdog Ofwat confirmed the penalty and bills rise on Thursday.

It is the first time Ofwat has used its new powers to take action against companies that pay dividends regardless of their performance.

The rules were introduced in May 2023 to stop companies making dividend payments that could not be justified by Ofwat’s performance measures. Thames “failed to comply with these”, the regulator said.

A spokesperson for Thames said the company disagreed with Ofwat’s decision and would offer a full response in due course.

“We take our licence obligations very seriously, including those relating to the declaration and payment of dividends,” the spokesperson said, adding that the company had only made the payments after “a consideration of the company’s legal and regulatory obligations”.

Separately, Ofwat said that water bills for millions of customers in London and the south-east England will see their water billswould increase by £152 on average over the next five years.

The water industry regulator Ofwat, said on Thursday that the struggling utility firm Thames would be allowed to increase bills by 35% by 2030 in its much-anticipated “final determination” on the business plans of water companies in England and Wales. That represents a 35% increase before inflation, which will be added on top. It means water bills for millions of customers in London and south-east England will increase by £152 on average over the next five years.

The company’s £18m penalty was for a £37.5m dividend it paid last year and a £158.3m dividend this year.

Ofwat said it would also “claw back value” by adjusting its price controls to recover £131m of the dividend payments, defined as a surrendered tax loss by Thames.

David Black, the chief executive of Ofwat, said: “Ofwat’s £18m penalty and clawing back the value of £131m in unjustified dividend payments is a clear warning to the whole sector: we will take action against companies who take money out of these businesses, where performance does not merit it.”

The decision is seen as crucial in determining the future of the debt-laden company, which is trying to secure £3bn in emergency funding and a further £3.25bn equity investment to prevent its collapse.

In a preliminary decision on Thames’s business plan in July, Ofwat refused a request from the company to increase bills by 44% over the next five years, saying it would only allow 22%, equivalent to a £99 increase to £535 on average by 2030.

Thames later said that if it was not allowed to raise bills by 59% – an average of £228 by 2030 – it “would also prevent the turnaround and recovery of the company”, as relations between the company and Ofwat appeared increasingly strained.

In March, investors pulled the plug on £500m of funding, arguing the regulator had made Thames “uninvestible” for shareholders.

In a statement, the company said: “Given its importance and complexity, Thames Water will take time to review the determination in detail before making its response. The company will set out by early February the charges for customers that will apply from April 2025.”

Thames, which has 16 million customers, won court approval to secure the “critical” £3bn cash lifeline this week, but risks falling into a temporary, government-handled administration if it collapses. It will need further court approval to finalise emergency funding.

Across the industry, bills will increase by an average of £31 a year to £597 over the next five years, Ofwat said. Customers of struggling Southern Water will experience the biggest increase, with bills rising 53% over the five-year period to £642.

Thames and Southern Water have had some special conditions applied to them. They will be allowed to increase bills by an extra £11 and £20 respectively, by 2030, but only if they can show how and when they will deliver some of their service improvements.

Some of the fine print of what these conditions are and how they will be policed to access these extra funds are still being worked out by the regulator.

Chris Walters, a senior director at Ofwat, said these would be clarified in the new year.