The UK environment secretary has objected to a £10bn rescue proposal for Thames Water because it would place an “undue burden” on consumers, pushing the troubled utilities firm closer towards public ownership.

Emma Reynolds wrote to the regulator Ofwat on Monday to raise concerns about the plan for the UK’s biggest water company as she is worried that customers will lose out.

It is understood Reynolds is also concerned the deal would lead to reduced performance standards and delays to vital infrastructure improvements.

Ofwat was close to a deal under which the struggling company would avoid any new fines over sewage leaks for four years in return for a cash injection into the business from its creditors, which would take over the company.

Reynolds said on Tuesday: “Thames Water customers have been let down for far too long, with 15 years of underperformance, increasing serious pollution and customers left to pick up the bill.

“I have written to Ofwat to outline my early views that I am not convinced the current proposal is good enough for consumers or the environment. We stand by for any outcome.”

Reynolds is concerned the rescue package would place an undue burden on consumers, according to the Times, which first reported her concerns.

Earlier this month, Andy Burnham said Thames Water should be nationalised, revealing that public ownership of water companies would “absolutely be an option” under his potential leadership of the Labour party.

Burnham, Labour’s candidate in the Makerfield byelection, had previously called for “greater public control” over the companies, and told the Guardian this could mean nationalisation. He is understood to have met water campaigners including the former Undertones frontman, Feargal Sharkey, who is an advocate for nationalisation of water.

Thames serves about 16 million people in London and the south of England. Since the company was privatised under Margaret Thatcher, the successive private equity firms that have owned it have loaded the company with £17.6bn of debt, and it is now close to collapse.

The government has to decide whether to take it into special administration, a form of temporary nationalisation, or accept a deal offered by its creditors that would write off up to £1bn in fines for illegally polluting the environment. If the government waves through the rescue deal, the company would be part controlled by Elliott Investment Management, which is run by the billionaire Trump donor and hedge funder Paul Singer.

Elliott is one of the leading creditors in a consortium, named London + Valley Water, that includes Silver Point Capital, BlackRock and M&G. The consortium of hedge funds, known as London & Valley Water, wants to take over Thames in a multibillion-pound restructuring.

Thames has been battling to stave off financial collapse for more than two years. Bosses tried to sell the company last year but their preferred bidder, KKR, pulled out of the deal at the last minute.

It had been expected that the government would give its backing to the Thames Water takeover this summer, with the utility company fast running out of cash and said to be facing collapse within months if a deal was not forthcoming.

Under London & Valley Water’s proposed deal, it would inject £3.35bn of new equity into Thames Water and up to £6.55bn in new debt. But it is said that Thames Water would also have to pay nearly £750m to its creditors, lawyers and advisers as part of the restructuring.

The supplier would reportedly be on the hook for £160m in fees, plus £285m in accrued interest owed to creditors.

Ofwat has been contacted for comment.