The environment must be prioritized over business interests in the "lawless" water sector, according to the Lib Dems.
A bill to relaunch the "disgraced firms" as "public benefit companies" in the US has been drafted by the party.
They wouldn't be renationalized, but the water regulator would mandate that they be operated for the benefit of the environment as well as for financial gain.
The biggest water company in the UK, Thames Water, is currently negotiating a funding deal as it prepares to go out of business.
Until a new buyer is found, the government might temporarily take over the company if it is unable to secure additional funding.
The government and the industry are facing increasing pressure to take more action regarding the discharge of raw sewage into rivers and seas, which has turned water quality into a significant political issue.
In order to pay for the sewage crisis, the water industry is reportedly pushing for permission to raise water prices in England by up to 40% by 2030, inciting outrage over the cost of living and the amount of dividends the companies were paying to shareholders.
40 percent is "probably not unrealistic," according to Sir John Armitt, chairman of the National Infrastructure Commission.
We must determine the caliber and level of infrastructure we need as a nation, he said on Radio 4's Today program.
"Then we have to decide if we want to pay for it, if we can afford to pay for it, and we have to take care of those who (have) limited resources and therefore cannot easily handle additional bills. ".
According to the Lib Dems, they intend to exert pressure on Conservative MPs in the south of England, in seats they intend to win at the upcoming general election.
There is "no time to waste in dismantling this scandal-ridden industry," according to the party's environment spokesman Tim Farron, whose Thames Water (Public Benefit Corporation) Bill would be "an important first step to finally turning around this sinking ship.".
While unable to comment on Thames Water's financial situation in the Commons, Water Minister Rebecca Pow assured lawmakers that the water industry as a whole was "financially resilient" and that the government had a "plan for water" to combat pollution.
The industry, which the Conservatives privatized in 1989, increased the amount it was investing in infrastructure to address "sewage issues," according to the argument made by the speaker.
She contended that while businesses needed to distribute dividends to shareholders in order to keep luring investment, the regulator Ofwat was taking enforcement action against those who did not tie these payments to performance.
Jim McMahon, the shadow environment minister for Labour, claimed that the Conservative Party's failed experiment of putting profit above the interests of the public was to blame for the Thames Water crisis.
He charged the party with "handing over the water industry at a knockdown price, together with the entire infrastructure serving the nation, over to private enterprise," without regard for the protection of the country's security or the interests of the taxpaying public.
Labour has abandoned its pledge to re-nationalize the water industry and other public utilities, which it made when Jeremy Corbyn was the party's leader.
However, if it gains power, it has not yet provided any specifics regarding its plans to reform the sector.
A spokesman for Labour stated, "We're not looking to spend hundreds of billions of dollars and take years to sort out who owns the water industry.
But regardless of ownership status, the water industry needs a strategy that promotes innovation and raises standards. The public shouldn't have to deal with the mess or pay for the Tories' failure. " .
The water companies would be transformed under the Lib Dem plans into "Public Benefit Companies," with a mandate to pursue environmental goals while making no more than a "reasonable" profit. Additionally, they would need to add environmental specialists to their boards.
The concept is derived from Public Benefit Corporations, which are legal entities present in 36 US states. Among the businesses utilizing the public benefit model are Unilever-owned Ben and Jerry's ice cream, outdoor clothing retailer Patagonia, and crowdsourcing platform Kickstarter.
According to a Lib Dem source, applying it to the UK water sector "would mean the insultingly high dividends paid out to overseas shareholders would drop, and instead be given to fix the sewage system." The firms could still repay investors, but at "a slower pace," the source added.
The idea was rejected by Ms. Pow during the Commons debate because the party was unable to explain "where the money is going to come from" to pay for it.
The Lib Dems maintain that their proposal would not incur any costs for taxpayers because it only calls for a change in the way the businesses are currently run.
