Southern Water serves 2m households in southern England

Southern Water alerted regulator Ofwat and the Serious Fraud Office last month after its staff found "irregularities". Affected customers are entitled to �25.

Spokesman Geoff Loder said the company had sent out 700 cheques, and hoped to mail 500 more by the end of the month.

It was carrying out an investigation into how the mistakes were made.

Southern Water has 2m customers in Kent, Sussex, Hampshire and the Isle of Wight.

'Big shock'

The cost of refunds could be as high as �2.5m.

Staff introducing a new system discovered that performance figures reported to Ofwat did not match what actually happened.

"It was a big shock to the company, and the ironic thing is that it was only found out because we were introducing a new system to improve customer service," said Mr Loder.

He said the company's priority was to make sure its customer service centre was now operating as it should.

Staff were also looking at thousands of paper records of customer correspondence and millions of microfilmed records, possibly going back several years.

"By the end of November we hope to have cleared everybody who sent us a written complaint in the last year and didn't get a reply on time," he said."