Southern Water could be fined millions for mishandling customers' complaints.

Shareholders could face a massive penalty after managers admitted they had failed to report thousands of delays responding to customers' queries.

Industry watchdog Ofwat announced yesterday it will penalise the company for failing to achieve performance standards.

Ofwat can fine the company up to ten per cent of its annual turnover - in 2004/ 05 Southern Water made £468 million.

The company could be fined up to £47 million. Thousands of customers could also be in line for £25 payments after the firm failed to tackle their complaints.

Philip Fletcher, Ofwat's director general of Water Services, said: "A financial penalty will send a clear message each water company must meet its legal obligations to its customers."

Southern Water brought in a team of experts to find out why it had originally neglected to inform Ofwat it had failed to respond promptly to customers.

The firm had told Ofwat it had successfully responded to 2,500 complaints within the statutory time limit of ten days during 2004/ 05. In fact, it had received 8,000 complaints and had failed to respond to a significant proportion of them in the allotted time.

It also neglected to report a significant proportion of the 60,000 billing inquiries it failed to answer within ten days.

In both cases, the figures reported to Ofwat did not match Southern Water's performance.

The inconsistencies emerged as the company transferred millions of correspondence details into a new customer billing system.

Southern Water also alerted the Serious Fraud Office to the irregularities and is identifying customers who are owed money.

Ofwat has been investigating the company's failures under the Guaranteed Standards Scheme (GSS). It is the first time it has used its powers, which were only issued in April 2005 and are not retrospective.

A spokeswoman said: "The penalty will have to be borne by their shareholders. They are not allowed to pass it on to customers."

A spokeswoman for Southern Water said: "Any fine will be borne by the company and we can assure customers it will not, in any way, be passed on in charges."

The Serious Fraud Office is considering whether to launch its own enquiry.