Southern Water alerted Ofwat after managers found inconsistencies

Investigators were called in last year after a new management team at the water company found inconsistencies in reporting of service standards.

They alerted industry watchdog Ofwat, and the SFO was brought in. It had been thought the firm may have deliberately misled regulators.

But on Friday, the SFO confirmed the inquiry had been discontinued.

Southern Water chief executive Les Dawson said: "We launched a joint inquiry with Ofwat, bringing in a specialist team of independent investigators from KPMG."

Billing system

He said the inquiry looked at "inconsistencies relating to the reporting and handling of response levels to customer inquiries and complaints".

Mr Dawson added: "Information gathered during the course of this independent inquiry was passed to the SFO, who reviewed the matter.

"However, we have now been informed that they do not intend to pursue it."

He said a new �20m billing system introduced in February would help deliver an improvement plan over the coming year to raise customer service standards.

Improvements must now be forthcoming Consumer Council for Water

The inconsistencies found by the management team related to response times for billing inquiries and complaints from customers.

It emerged that as a result of the failures, the firm may have omitted to pay customers compensation, as water utilities are required to do if they fall short of standards under the industry's Guaranteed Standards Scheme.

The company provides water supply and wastewater treatment to about two million customers in Kent, Sussex and Hampshire.

The Consumer Council for Water Southern said it still remained concerned about Southern Water's level of service

A statement said: "We are pleased the company has dealt with the payments for historic problems, but expect its customer service problems to be addressed as a matter of urgency.

"Customers' reasonable expectations are not being met and improvements must now be forthcoming if customers' confidence in the company is to be restored."