THE water industry regulator has resumed its investigation into customer service failures at Southern Water after the Serious Fraud Office (SFO) called off its own probe.

Southern Water admitted it misreported its performance and says it failed to pay £500,000 in compensation to about 20,000 customers, many in Hampshire, for responding to complaints too slowly. More than 11,000 cheques have been issued. The firm told the regulator Ofwat it was meeting its response times.

The decision by the SFO to call off a 17-month probe freed up Ofwat.

A spokesman for the SFO, which investigates complex frauds usually totalling more than £1m, said: "There is insufficient evidence to proceed to any criminal charges."

Southern Water's chief executive Les Dawson said all customer service performance had "improved significantly" since a new management team discovered the inconsistencies in October 2005.

He said Southern Water now had customer service at the heart of its business and was determined to "exceed customers' expectations in terms of both service delivery and value for money".

Mr Dawson went on to apologise for teething problems in a new £20 million billing system installed in February and said 100 more staff had been brought in.

Ofwat has already given Southern Water notice it intends to fine it up to 10 per cent of its £540m annual turnover.