The UK environment secretary has reportedly 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, the environment secretary, wrote to Ofwat, the regulator, on Monday to raise concerns about the plan for the UK’s biggest water company, according to the Times, as she is worried that customers will lose out.

Ofwat was close to a deal with lenders 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.

Earlier this month, Andy Burnham said Thames Water should be nationalised, revealing 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 group 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.

The Department for Environment, Food and Rural Affairs and Ofwat have been contacted for comment.