The 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 and its lenders have said a market-led solution would be better for the company and its customers.
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, 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, 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.
A spokesman for the group has previously said the proposed rescue deal would "fund significant improvements for customers, clean up local rivers and achieve full compliance as quickly as possible".
"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.
Ofwat, which regulates water companies in the UK, 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 told the BBC: "We remain of the view that a market-led solution is the best way to secure the long-term stability needed to continue improving performance and advancing our turnaround plan, for the benefit of customers, the environment and our stakeholders.
"Our priorities remain on providing safe, resilient services for customers, supporting our colleagues and working closely with suppliers, government and regulators."
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.
But a spokesperson for Thames Water has previously told the BBC that a SAR would create problems rather than solve them.
"SAR would delay urgently needed improvements, increase costs, transfer risk and potentially create operational disruption," the spokesperson said.
Its lenders, London & Valley Water, have previously said that nationalisation will not solve the company's problems and will only "restart the process of fixing Thames Water".
A spokesperson said last week that nationalisation would take "billions of pounds of government financial support, increase uncertainty for employees, put pensions at risk, destabilise the supply chain, and make it harder to deliver the improvements customers deserve".
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".
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 and its lenders have said a market-led solution would be better for the company and its customers.
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, 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, 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.
A spokesman for the group has previously said the proposed rescue deal would "fund significant improvements for customers, clean up local rivers and achieve full compliance as quickly as possible".
Government 'ready' for all scenarios
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.
Ofwat, which regulates water companies in the UK, 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 told the BBC: "We remain of the view that a market-led solution is the best way to secure the long-term stability needed to continue improving performance and advancing our turnaround plan, for the benefit of customers, the environment and our stakeholders.
"Our priorities remain on providing safe, resilient services for customers, supporting our colleagues and working closely with suppliers, government and regulators."
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.
But a spokesperson for Thames Water has previously told the BBC that a SAR would create problems rather than solve them.
"SAR would delay urgently needed improvements, increase costs, transfer risk and potentially create operational disruption," the spokesperson said.
Its lenders, London & Valley Water, have previously said that nationalisation will not solve the company's problems and will only "restart the process of fixing Thames Water".
A spokesperson said last week that nationalisation would take "billions of pounds of government financial support, increase uncertainty for employees, put pensions at risk, destabilise the supply chain, and make it harder to deliver the improvements customers deserve".
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".
