The water industry regulator has put Thames Water into unprecedented special measures, allowing extra scrutiny of the struggling water supplier as it faces the prospect of a painful restructuring or temporary nationalisation.

Ofwat said on Thursday that the company, which is creaking under £15.2bn of debt, would be placed in a “turnaround oversight regime” and subjected to “heightened regulatory” measures, meaning it must regularly report on the progress of its investment plan.

It is the first time a water company has faced such measures and comes amid increased fears the supplier will collapse into a publicly funded administration.

The regulator made the announcement as it published its draft review on English and Welsh water companies’ business proposals, which found the Thames plan to be “unsatisfactory”.

Ofwat said customers at Britain’s biggest water company, which serves 16 million customers across London and the south-east, would face a 22% increase in their bills over the next five years, a £99 rise to £535. Thames had asked the regulator to raise bills by 44% over the next five years. Overall, the review suggested the average water bill across the companies could rise by 21%, or £94, over the next five years, also to £535.

Ofwat’s chief executive, David Black, said of the Thames business plan: “Costs were poorly justified, service levels were unsatisfactory and so that makes our job more challenging.” He said the response to Thames had been “fair” and that it was “up to Thames to convince investors” of its turnaround as it attempts to raise fresh funds.

The supplier’s plan was “late” and “incomplete”, said an Ofwat board member, Chris Walters. “Overall, it lacked ambition. Parts of it certainly did not have the assurance of Thames’s own board, and it’s difficult for us to stand behind a plan that a board won’t stand behind.”

Thames investors said in March that Ofwat had made the company “uninvestable” as they U-turned on £500m of pledged funding. The company said this week it would approach potential investors this autumn, before the regulator’s final verdict in December.

It said this week it had enough cash to fund its operations until next June. However, if it is unsuccessful in raising new funds it could fall into special administration, with the company temporarily nationalised and the bulk of its debts transferred to the state.

The Ofwat price review is viewed as crucial in giving certainty over future revenues and returns, but the restrictions on bill increases are unlikely to have boosted Thames’s attractiveness to investors.

Anthony Legg, a water industry expert at PA Consulting, said: “It is difficult to see how these measures restore investor confidence or at the same time allow the management team the space to deliver on its turnaround plan.

“The possibility of a special administration regime, despite government reluctance, appears to have increased, though this could still be avoided.”

Thames had submitted a revised business plan increasing its proposed spending from £18.7bn to £19.8bn. Ofwat said on Thursday the company would only be allowed to spend £16.9bn.

Within that sum, more than £3.3bn is contingent on Thames proving it is “ready and able” to make certain investments. Over the next five years, it has been tasked with reducing sewage spills by 64%, cutting leaks by 19% and reducing supply interruptions by two-thirds.

As a result of being put into special measures, Thames will have to provide a delivery action plan and regularly report on the progress of its spending programme. It will also have to provide a financial resilience plan and could be scrutinised by an independent monitor, who would be given full access to company information.

In order to exit the regime, it will need to show an improvement in its operating performance, delivery of investments and the state of its balance sheet.

The company could be limited in the amount of debt it can take on. Ofwat said it had suggested that, in a longer-term scenario, Thames could separate into two or more companies or list on the stock exchange to secure extra equity.

A spokesperson for Thames Water said: “Ofwat has asked us to look again at our turnaround plan, and is seeking enhanced oversight of our delivery against it. We are in any case taking stock of our turnaround plan under our new leadership and reflecting on our progress to date.

“We will consider all of Ofwat’s proposals as we go through this process. This is one stage in a longer process.”

Ofwat said it was asking “further questions” about a dividend payment of more than £150m, first revealed by the Guardian. Thames has said the dividend did not reach external shareholders. Black said: “We will want to get further confidence that that is the nature of those payments and whether customers’ interests have been protected.”