The water regulator has warned companies it is aiming for a "step change" in efficiency and customer service, calling on them to deliver bills that are "affordable for all".
Ofwat said poorly performing companies will face a "tough" review as it published a consultation around price controls for England and Wales between 2020 and 2025.
It promised to "step in to protect customers' interests" where companies' plans are not "sufficiently high quality", and said it would incentivise companies that provide help for vulnerable customers.
Ofwat chief executive Cathryn Ross said: "Water companies provide a genuinely vital public service to the customers and communities they serve.
"To deliver more of what matters to customers against these expectations and to keep bills affordable, companies will need to become much more efficient and innovative.
"Our plans will encourage companies to be ambitious in what and how they deliver for customers, the environment and society, now and in the future.
"Water companies which perform poorly will find this a tough review."
Suppliers are charging households in England and Wales an average £395 for their water and sewerage over the course of this year, an increase of £6 as companies invest in tackling leakage and flooding.
Companies are currently rolling out compulsory water meters for households in areas of the South East designated as being under "serious water stress".
Tony Smith, chief executive of the Consumer Council for Water (CCWater), said: "We need to make sure the price review is focused on delivering the outcomes that customers really want to see, including acceptable bills.
"Ofwat wants to strengthen the role of performance rewards and penalties which have the potential to benefit customers, but we need to guard against water companies being rewarded for simply doing their day job.
"The next price review should also signify the moment that there was a clear step change in resilience so we can be confident the industry has safeguarded the long-term future of the services that matter most to customers."
Companies will submit their business plans to Ofwat in September next year and Ofwat will publish its final decisions in December 2019.