PA MediaThe government has objected to a proposed rescue deal for Thames Water, in a move which takes the UK's largest water company a step closer to a form of nationalisation.
Environment Secretary Emma Reynolds wrote to the industry regulator on Monday to raise concerns over the £10bn package put forward by the firm's lenders.
Fears the company could collapse first emerged three years ago, and the government has been on standby to take control if required ever since.
Reynolds said the deal does not do enough for consumers or the environment, but Thames's creditors said its plan was "the fastest route" to improving the firm's performance.
If the company does go bust, households will still have drinking water and sewerage services.
Thames Water — which serves about 16 million customers, mostly across London and parts of southern England — has faced heavy criticism in recent years over its performance, sewage discharges, and pipe leaks.
In May last year, it was handed a £122.7m fine, the biggest ever issued by the water industry regulator Ofwat, for breaching rules on sewage spills and shareholder payouts.
A group of its existing lenders has offered to write off £9.4bn of its near £20bn debt pile and inject billions in new money, but want leniency from future pollution fines in return.
London & Valley Water (L&VW), a consortium of large financial institutions and investors, said some £3.35bn of cash would be put into the company along with a new £6.55bn debt facility. It would be part of a £10bn business plan until 2030.
Reynolds said on Tuesday that she did not want a scenario where Thames Water customers had to "pick up the bill for the company's failures".
"I have written to Ofwat to set out my early concerns that the creditors' proposals don't do enough to protect consumers and the environment".
She added that the government "stands ready for all eventualities", including temporary nationalisation.
Reynolds is due to address Parliament on Tuesday.
L&VW hit back at Reynolds's comments, saying it did not "recognise" her characterisation of the deal as bad for customers and the environment.
A spokesman for L&VW said the proposed deal was a "long-term solution that recognises the full extent of Thames Water's problems".
"All other routes offer significantly worse outcomes for customers and the environment. Our proposals do not anticipate any increase in customer bills beyond those set out by Ofwat," they added.
"Creating further delay and transferring risk to the taxpayer with special administration is not the right answer. It will only delay the process of fixing Thames Water."
Ofwat has been reviewing the proposal and a decision is expected this summer.
Without a rescue deal agreed, Thames Water is set to run out cash within a matter of months and could collapse.
Thames Water reiterated on Tuesday that it believed a market-led solution was the best option for customers and the environment.
A spokesperson for the company said: "It is positive that the Secretary of State has provided feedback to Ofwat in relation to the London & Valley Water plan.
"We will continue working with all parties to reach an agreement that supports long-term financial stability."
The BBC has contacted Ofwat for comment.
The government has previously said it would prefer "a market-based solution", but would step in "if that were to become necessary".
The form of temporary nationalisation on the table is known as a special administration regime (SAR), which ensures vital companies such as water, are kept running by government appointed managers.
Proponents of the SAR solution say that it would give Thames something of a fresh start, allowing it to write off some of its losses and be sold without such a large debt pile.
In July last year, the boss of Thames Water, Chris Weston, said the company was "extremely stressed" and that it would take "at least a decade to turn around".
Get our flagship newsletter with all the headlines you need to start the day. Sign up here.
