A water company that admitted a “terrible crime” against its customers has been fined £20.3 million.

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

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

Southern Water, which was bought last month by a consortium led by JPMorgan and the Challenger Infrastructure Fund, of Australia, for £1.3 billion from the Royal Bank of Scotland, was accused of systematically manipulating information to conceal the company’s true performance over an extended period of time.

Les Dawson, who became chief executive at the company in 2005, just as the problem was revealed, said: “We committed a terrible crime. The fine hurts, but it should do.”

Mr Dawson said that Southern Water staff distorted “virtually every measure” for customer service. Staff backdated letters to customers and destroyed letters received from them. When the problem was discovered, 14 people were suspended. Since then, two people have been dismissed, some have left the company and others have been demoted.

The company has already begun to pay back its customers to the tune of £1.50 a year as a credit on 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 (SFO).

A joint investigation was begun with Ofwat, using a team of independent investigators from KPMG. Thousands of paper records were reviewed and an independent company was appointed to review nearly 13 million micro-filmed records from the previous nine years. As a result, more than £500,000 in payments were made to customers who had been disadvantaged, Southern Water said.

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

Mr Dawson said: “I would like to reassure customers that to 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.”

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 multimillion-pound fine by the end of the year.

Analysts believe that Severn Trent could be given a much more substantial fine as it has many more customers.

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