South West Water is under pressure to hike bills for thousands of households across the Westcountry to pay for discounts for the poorest.
The Government has issued guidance to water firms to create "social tariffs" to help those most struggling to pay the levy.
But the document suggests water companies should push up prices for households not benefiting from the reduction by up to 1.5% to fund the discount.
This would equate to adding £8 to the average South West Water bill, which is already the highest in the country, and would eat into a £50 Government discount to be given to customers from next year.
The Environment Department (Defra) said water companies are bound by regulator Ofwat's licensing conditions, leaving them unable to reduce bills for certain customers. But the new guidance will free them to make cuts for struggling customers.
MPs in Devon and Cornwall had called for a national discount scheme funded by all water companies, which would have disproportionately helped the Westcountry. But ministers rejected the idea, opting for individual companies to come up with their own plans.
Announcing the policy at the Rio+20 Conference in Brazil yesterday, Deputy Prime Minister Nick Clegg said: "If you're struggling to make ends meet, not paying for essential utilities isn't an option but it can mean making tough choices elsewhere, like sacrificing healthy meals for the family or new school books."
This year, South West Water's average bill rose by £26 to £543. That's £167 more than the national average.
Legislation has now been passed to give every household in the region £50 off their bill each year from next May.
The unprecedented move – effectively a £35 million annual Treasury bailout – addresses the long-standing "unfairness" felt by the region because of botched water industry privatisation in the 1990s. The "social tariff" reform addresses a separate issue to tackle "affordability".
South West Water, which provides services to 700,000 households, will now consider how to respond to the guidance and adjust its existing help schemes.
Andrew George, Liberal Democrat MP for St Ives, warned there was "little incentive" for South West Water to introduce significant levels of help to hard-pressed families.
"Wherever you draw the line you will be asking households on medium-to-low incomes to pay more so a relatively small number of people might benefit," he said.
A spokesman for South West Water said: "We are already looking at several options for a new company social tariff, but we will need to examine the practicality of each with different groups of customers to help choose a model which will work in the long term.
"We also need to balance the desire to help individuals who have difficulty paying their bills with the interests of all our customers."