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Thames Water is facing a £12.5 million fine for providing poor service to customers and failing to provide the industry regulator with accurate information.

In a statement today Ofwat said it was proposing the fine because "poor processes and systems" meant that customers received a sub-standard service and also missed out on compensation payments they would have been entitled to.

Thames Water said it intended to challenge the "disproportionate" penalties proposed by Ofwat over service failures and the misreporting of regulatory information.

But Ofwat insisted that the proposed fine was appropriate given the seriousness of the charges against the company and stressed that the penalty took into account actions Thames Water had taken to remedy the situation.

The water firm said it had alerted Ofwat as soon as it became aware of the reporting errors, which took place over a 12-month period between 2005 to 2006. Although the irregularities led Thames Water customers to miss out on compensation payments over the company's failure to meet guaranteed service standards, the firm said it had put in place a voluntary package to compensate them.

It stressed that the compensation package also covered previous years and was paying nearly £6 million in mandatory and discretionary payments and interest.

But Ofwat was unbending in its criticisms of the company, describing its reporting systems as "inadequate".

"Deficient systems and low business priority on reporting non-financial data led to these serious failings," Ofwat chief executive Regina Finn explained.

"Our proposal to fine Thames reflects this and gives a clear signal to both the company and the water industry that non-compliance is not a cheap or easy option."

Ofwat also stressed that Thames Water's shareholders, rather than its customers, would foot the bill for the fine.

However the company, which insists there is "no justification" for the level of the fine imposed by Ofwat, has disputed the claim.

"What particularly concerns us is this large sum of money could be spent directly on improving services to customers, but the only benefit will be to the Treasury. This makes little sense," said Thames Water chief executive David Owens.

Following a four-week public consultation period Ofwat will decide on the final level of fine that should be imposed on Thames Water.