Prime Minister Andy Burnham is considering changes to Britain's insolvency laws that could make it easier for the Government to take failing utilities into public control.
The proposals centre on reforming the Special Administration Regime, the emergency process used to keep essential services operating when companies such as water or energy providers collapse or seriously fail.
Burnham's team is examining whether the existing rules should be changed after concerns that the current regime could make intervention in companies such as Thames Water costly, legally difficult and slow.
No final policy has been adopted and no legislation implementing the proposed changes has yet been published.
Burnham examines special administration reform
The Guardian reports that Downing Street is looking at proposals to amend the circumstances in which a utility can be placed into special administration.
The existing water-industry regime has a deliberately high threshold. Government guidance says evidence is currently required that a company is insolvent or is in, or likely to be in, serious breach of a principal statutory duty or enforcement order before an application can be made to the court.
The proposals being examined would potentially introduce lower financial thresholds alongside new environmental performance triggers.
That could make it easier for ministers to intervene before a failing utility reaches the point of outright financial collapse.
New triggers could include environmental performance
A proposal developed by Labour MPs and the Good Growth Foundation would allow serious environmental failings to play a greater role in decisions over whether a water company should enter special administration.
The plan could be incorporated into forthcoming water legislation, although the Government has not confirmed that it will adopt the proposal.
Supporters argue that the current regime can leave ministers waiting until a company is close to insolvency even where pollution, infrastructure failures or other performance problems have become severe.
Critics are likely to argue that lowering the threshold for intervention could undermine investor confidence and expose the Government to legal challenges from creditors.
'Bail-in' mechanism also under consideration
The package being discussed also includes a possible “bail-in” mechanism intended to ensure shareholders and creditors bear more of the financial cost when a utility fails.
The approach has been compared with mechanisms used in the banking system, where losses can be imposed on investors rather than being transferred immediately to taxpayers.
Supporters of the proposal argue that such a system could reduce the public cost of taking a failing utility into special administration.
Any workable mechanism would require detailed legislation setting out how creditor claims, shareholder losses and the continued financing of essential services would be treated.
Thames Water at centre of debate
The debate has been intensified by the continuing crisis at Thames Water, which carries approximately £20 billion of debt and supplies around 16 million customers.
Reuters reported this week that Burnham had stepped back from an immediate move to place the company into special administration after officials raised concerns over taxpayer costs, litigation and practical difficulties.
Thames Water has estimated that special administration could require around £2 billion of taxpayer support during the first 18 months.
The Government has not formally ruled out using special administration, and ministers have continued to say that options remain open while a creditor-led rescue plan is assessed.
Creditors threaten legal challenge
Any attempt to rewrite the special administration rules could face significant opposition from Thames Water's creditors.
The Guardian reports that creditors have threatened judicial review if the Government changes the regime in a way that damages their interests or facilitates a forced administration.
That means reforms designed to make public intervention easier could themselves become the subject of a substantial legal dispute.
The outcome would depend on the wording of any legislation eventually brought forward and how it affected existing contractual and property rights.
Government already plans wider water reform
The Government's existing water-sector white paper has already committed ministers to strengthening contingency planning for special administration and ensuring regulators can act decisively when the existing legal threshold is met.
Official policy documents describe special administration as a mechanism that allows vital public services to continue while a company is restructured or transferred to new owners.
The fresh proposals would potentially go further by changing the threshold itself and altering how losses are distributed when intervention occurs.
For now, those measures remain under consideration rather than confirmed Government policy.