Southern Water will have to pay out £20.3m in fines after an investigation concluded it had deliberately misreported information and provided a poor service to its customers.
Water watchdog Ofwat confirmed it had imposed the fine, which is equivalent to more than 3.5% of the company's turnover, following an investigation that began in October 2005.
Southern Water bosses contacted Ofwat when a project to install a new billing system revealed that the company had not given the regulator correct information about its response times to customer complaints.
It had also failed to make a number of guaranteed standards payments - a compensatory payment of £25 for domestic customers and £50 for business customers if targets for responding to complaints, resolving queries and setting appointments are not met.
Ofwat chief executive Regina Finn said Southern Water had behaved "unacceptably" over a long period of time.
She added: "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."
Southern Water apologised to its customers and confirmed that it will reduce future bills, which were higher than they should have been as a result of the misreporting. Customers will be refunded an average of £10 over the next three years.
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."
The company's shareholders will bear the entire cost of the fine - a move which has been welcomed by the Consumer Council for Water.
But the organisation said Ofwat's penalty should benefit Southern Water's customers, rather than the Treasury.
David Bland, chairman of the Consumer Council for Water London and South East, said: "We agree that Southern Water should be penalised and that the level is appropriate to the circumstances.
"Because customers suffered from Southern Water's shortcomings we would have preferred a penalty which benefited them."
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