A water company that backdated letters to customers and deliberately misled regulators has been fined £20.3 million in a ruling that is expected to serve as a warning to the rest of the industry to maintain standards of reporting and customer service.

Ofwat today confirmed that it has fined Southern Water a total of £20.3 million, a fine which must be paid by the company's shareholders rather than passed on to its customers.

Regina Finn, chief executive of Ofwat, said: "Southern Water behaved unacceptably in deliberately misreporting customer service performance to Ofwat and systematically manipulating information to conceal its true performance over an extended period of time and the company has acknowledged this."

"We expect companies to comply with their obligations and this fine sends a clear message that non-compliance is not a cheap or easy option," Ms Finn said.

Ofwat gave notice of its intention to fine Southern Water in November and the water company's chief executive made a full apoogy. Southern chose not to make any representations over the fine during the consultation period, but it has the right to appeal to the courts if it disagrees with the fine.

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 Pounds 10.50 per household.

Les Dawson, chief executive of Southern, said: “Today’s announcement draws a line under a shameful period in the company’s history when an area of the business was deceiving our customers and the regulator. The new management team has put procedures into place to ensure this will never happen again and once again we apologise to our customers.

“I can also assure them that the fine will be borne by the company’s current shareholders even though neither they, nor our previous owners, knew of the deception that took place before the company’s present management team was appointed.”

The water company, which was bought in October 2007 by a consortium led by JPMorgan and the Challenger Infrastructure Fund, of Australia, for Pounds 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.

In November Mr 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."

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.

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).

The SFO dropped its inquiry in April 2007, saying that there was insufficient evidence to proceed with a criminal prosecution against the company.

Southern has also agreed with Ofwat, to reduce future customer bills which were higher than they should have been as a result of the misreporting.

From April 2007 to April 2009 the company will, therefore, keep its annual price increase below that allowed by the regulator, refunding an average of £10 per customer in total over the three years.

A second water company, Severn Trent, has been the subject of a similar investigation over misreporting of critical datea and is now facing a criminal prosecution and multimillion-pound fines after the Serious Fraud Office said it was bringing charges over allegations made by a former company employee.

Severn will be the first utility to be prosecuted by the SFO when it charges the company with three offences, relating to alleged misreporting of data on leaks to the water regulator between 2000 and 2002.

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