A water company which has admitted "appalling" behaviour in overcharging its customers was hit with a multi-million pound fine today.

Southern Water, which supplies 1.8 million households with water and sewerage services in Sussex, admitted that it misled the regulator over a period of seven years, leading to its customers being overcharged by an average of £10.50 per household.

Shareholders in the business will pick up the £20.3 million fine imposed by Ofwat, the biggest penalty levied since the regulator was given fining powers two years ago.

Southern Water, which was recently bought by a US investment bank for £4.2 billion, was accused of systematically manipulating information to conceal the company’s true performance over an extended period of time.

“The company benefited directly from this misreporting at the last two price reviews, meaning Southern was able to increase its prices by more than it should have done," Ofwat said today.

Southern Water said that its shareholders would bear the cost of the fine. The company has already begun paying back its customers to the tune of £1.50 a year, through their bills.

Problems at the water company were discovered when a new management team was appointed in October 2005. The inconsistencies in the reporting of service standards were reported to Ofwat and the Serious Fraud Office.

A joint investigation was then launched with Ofwat, bringing in a team of independent investigators from KPMG. Thousands of paper records were reviewed and an independent company was appointed to review nearly 13 million microfilmed records from the previous nine years.

As a result, more than £500,000 was paid to customers who had been disadvantaged, Southern Water said.

The SFO dropped its inquiry in April, saying there was insufficient evidence to proceed with a criminal prosecution.

Les Dawson, chief executive of Southern, said: “We committed a terrible crime. The fine hurts but it should do.

"I would like to reassure customers that those historically entitled to guaranteed standards payments have now been paid and that we are well on course to meeting a service improvement plan agreed with the regulator.”

He told the BBC this morning that the group's behaviour had been appalling.

A second water company, Severn Trent, which has been the subject of a similar investigation is also likely to be hit by an as yet undisclosed multi-million pound fine by the end of the year. Analysts believe Severn Trent could find itself with a much higher fine as it has many more customers.

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