Southern Water has been fined £20.3 million for poor service and deliberately misreporting information.
Water regulator Ofwat said the firm’s shareholders will bear the entire cost of the fine, which will not be passed on to customers.
It added that Southern Water had systematically manipulated information to conceal its true performance.
Southern Water, which provides water and waste-water services to nearly two million households in Kent, Sussex, Hampshire and the Isle of Wight, said it accepted Ofwat’s fines.
The firm misreported its customer service performance to the regulator over a period before October 2005.
It also failed to make compulsory compensation payments of £25 to customers over poor service, known as guaranteed standard payments.
Ofwat Chief Executive Regina Finn 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.’
The fine follows a two-year investigation which was sparked in October 2005 when Southern Water’s new management team discovered irregularities.
They found incorrect figures had been reported to Ofwat relating to the firm’s response times to customers who had contacted its customer service centre.
The £20.3 million penalty is made up of two fines imposed by Ofwat – one for misreporting of customer service statistics and the other for its failure to make guaranteed standard payments.
Southern Water Chief Executive Les Dawson 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.’
Mr Dawson added: ‘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.’
In addition, Southern Water has agreed with Ofwat to reduce customer bills, which were higher than they should have been as a result of its misreporting.
The company will keep its annual price increase below the amount permitted by Ofwat from April 2007 to April 2009.
This means it will in effect refund an average of £10 per customer, the firm said.
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