Severn Trent could be forced to return up to £40 million to customers as Ofwat prepares to bring further sanctions against the water company.

Ofwat is expected to reveal shortly how it intends to deal with the company's misreporting of water leakage levels, for which it was fined £2 million at the Old Bailey yesterday.

It is expected that the water regulator will ask the company to agree to cut prices for all Severn Trent customers. It cannot levy a fine, as the regulator had no fining powers in the period from 2000 to 2002, when the company misreported data on water leakage.

However, the price reduction order could amount to up to the equivalent of a month's free water for Severn Trent's 3.7 million customers.

Separately, Ofwat has already proposed to fine Severn Trent £35.8 million for a subsequent misreporting of customer service standards and it is expected to confirm in a stock market annoucement this week that it will proceed with the proposed fine, after it was put to consultation.

In a statement yesterday, Ofwat said: “For a water company to be prosecuted like this is unprecedented. Severn Trent Water's behaviour in misleading both customers and regulator was unacceptable. Ofwat will protect consumers and companies must comply with their legal obligations or pay the price.

“Following a separate investigation, we have also proposed to fine the company £35.8 million in April 2008 for deliberately misreporting customer service data. We will issue our conclusions on this shortly.”

When sentencing the company for misreporting leakages yesterday, Judge Jeremy Roberts, QC, indicated that £4million would have been a more suitable fine but he said that he had taken into consideration the company's early plea and co-operation with the Serious Fraud Office.

He also ordered Severn to pay £220,000 in costs to the SFO.

Tony Wray, the company's chief executive who attended the sentencing, largely blamed Severn's former management, who deny any wrong-doing, for the misreporting and said that nobody who was responsible still worked for the group.

The company, which was found to be misreporting leakages from a series of e-mails and board meeting records, had pleaded guilty to two offences under the Water Industry Act of marking false returns to Ofwat concerning 2001 and 2002. Severn Trent shares slipped 12p to £12.72.

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