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Chilean water utility Aguas Antofagasta, which serves northern region II, could face a fine of up to 500mn pesos (US$1.05mn) over a five-day cut that left over 200,000 people without potable water service.
Magaly Espinosa, head of Chile's sanitation service authority SISS, has said the authority is preparing legal action against the utility, local paper El Mercurio de Antofagasta reported.
The company infringed articles 34 and 35 of Chile's sanitation services law, which states that service providers must guarantee the quality and continuity of water supply, according to Espinosa.
Aguas Antofagasta's desalination plant halted operations on March 2 after it began to produce water with a foul odor, cutting off water supply to many parts of regional capital Antofagasta.
The company has said the malfunction was due to changes in seawater, including the appearance of algae, around La Chimba, where its main intake is located.
The city's water supply returned to normal on Monday (Mar 7).
Aguas Antofagasta is part of Chile's Luksic group.