Sir Keir Starmer is reportedly prepared to allow water bills across the country to be hiked to pay for a Government bailout of Thames Water.
Thames Water needs £10bn to keep it afloat and under the legislation all water users could foot the bill, the Telegraph reported.
Ministers have emphasised that the new powers would only be used to prop up the company if a buyer could not be found.
Thames Water said in July it has only enough funds to continue until May.
The government has ruled out nationalising Thames Water but could be forced to impose a special administration regime (SAR) if the company fails to find a buyer.
New powers in the Water (Special Measures) Bill will give ministers the power to pass the costs of the intervention on to other water companies, meaning water bills across the country could rise.
Supporting documentation makes it clear that the powers apply to all water companies, not just those taken into special administration.
A source in the Department for Environment, Food and Rural Affairs (Defra) told the Telegraph the powers to pass costs on to the companies would be a last resort.
The source added that, in the unlikely event that the Government could not get the full cost of the company in a private sale, it would consult on how to raise the money to pay for the shortfall.
A Defra spokesman said: “This is highly sensationalist. We have no plans to raise bills resulting from the unlikely event of a Special Administration Regime and we do not expect customers to pay the price for water companies’ mismanagement.
“The new measures in the Water Bill will protect taxpayers. This Government will always act to protect customers and the public.”
Ministers held talks with bosses of water industry investment firms in a bid to attract fresh capital earlier this month.
Environment Secretary Steve Reed held a meeting with 30 people representing investors in the sector such as pension funds in the City of London.
Mr Reed said he wants the water industry to “become one of growth and opportunity”, while also saying he hopes to “attract billions in private-sector investment”.
Few further details were given on how they might attract more investment, but ministers also expressed hopes that firms can reduce spills and upgrade England and Wales’ water infrastructure.
It comes amid mounting public and political fury around firms’ polluting of waterways with sewage spills as they continue to hand dividends to shareholders, and bonuses to executives – something which Labour has pledged to clamp down on.
The Government has said it wants the sector to reduce spills and even proposed sweeping new laws which could see bosses face up to two years in jail if they obstruct regulators.
The Water (Special Measures) Bill, introduced to Parliament on September 4, will hand new powers to Ofwat and the Environment Agency to take action on companies damaging the environment and failing customers.
