The move would give Mr Prescott direct control over Railtrack and infuriate the company, which has warned the change would cripple its ability to borrow money. It would also represent the biggest shake-up in the industry since the Railways Act started the privatisation process in 1993.
The outgoing Rail Regulator, Chris Bolt, will tell Mr Prescott there is nothing to prevent him changing the current system under which train operators receive subsidies but then hand much of it to Railtrack in the form of access charges. But he will warn that such a change could only be made as each passenger franchise comes up for renewal or through a new rail Bill - something that is growing increasingly unlikely this parliamentary session.
Railtrack warned that if Mr Prescott goes ahead with the plan it would scare off City investors and hamper its ability to raise money. A spokesman said: "We certainly believe this would be a retrograde step and would cause concern with the financial markets.
"The markets aren't keen to lend money to people who rely on direct government funding."
The company has raised pounds 650m on the bond markets in the past four months. It believes it is better for the market - in the form of the 25 train companies - to determine investment policy rather than a central body. Railtrack also criticised the view that it makes excessive profits for its shareholders. "Last year we paid dividends of pounds 110m but spent pounds 1.25bn so we are not bleeding the industry to pay our shareholders," the company said.
Mr Prescott confirmed that the proposal, which would give him far greater control over the privatised track and signalling monopoly, was still on the table. "A report is being prepared for me by the regulator and I expect to have it shortly and have discussions about it," he said.
The Rail Regulator's advice is confined to legal and technical matters.
Mr Bolt's letter confirms the advice he gave Mr Prescott in a conversation in January and follows the opinion given by his predecessor, John Swift QC, in his review of Railtrack's charges in July 1998.
Mr Bolt gives way to the new regulator, Tom Winsor, on 5 July. Mr Winsor's views are not known, although he has made it clear he believes he already has substantial powers that his predecessors did not use.
The Association of Train Operators warned a review of the charging structure could harm Railtrack's investment programme. A spokesman said: "We would hope they would ensure that money currently coming into the rail industry from the Government remains in the industry."
Railtrack's shares have fallen from a 1999 high of pounds 16.01 to pounds 13.56 at the close of last week in the wake of growing fears about the regulatory review.