The letter, written by a partner at the law firm Herbert Smith and dated 19 November, claims the proposed regulatory framework would prevent electricity suppliers from recovering unpaid bills or disconnecting customers outside their own franchise areas who refuse to pay.
The letter also claims that it would be unlawful to proceed even with the phased introduction of competition if the new system has not been fully completed, tested and implemented by April 1998.
According to Herbert Smith, the problems thrown up by the proposed changes in the licences that all electricity suppliers will require are such that entirely new primary legislation may be required.
The leaking of the letter comes just two days after Professor Littlechild turned down an appeal from the electricity industry for the liberalisation of the domestic market to be phased in over 18 months.
Instead Professor Littlechild has decided that the phasing in period should last only six months so that by September 1998 all 23 million domestic electricity customers will be entitled to shop around between suppliers.
The industry is also lobbying to be allowed to pass on the full costs of preparing for 1998 to their customers, put at between pounds 500m and pounds 1bn. The bulk of the money is investment in the computer systems, software and training needed to allow suppliers to settle accounts through the electricity pool and supply customers outside their existing monopoly franchise areas.
Commenting on the "fundamental legal issues" that have yet to be resolved, the letter says: "We consider that these issues and the failure to resolve them thus far are serious enough to suggest that it would be unlawful for you to adopt the proposed modifications and associated codes in anything like their present form." If these problems remain unresolved it would "undermine the legal basis of the 1998 project".
The RECs appear to be particularly concerned about how they would recover charges from customers who refused to pay or continued to receive electricity through their local supplier after a contract had expired with a "two- tier supplier" - a supplier other than the local electricity company.
"From their experience in the supply market to date our clients consider that market participants could suffer significant losses as a result of this problem which would, in turn, be passed on to paying customers in higher prices."
Last night a spokeswoman for Professor Littlechild confirmed he had received the letter and had written back offering a meeting to discuss the concerns raised.