But ISPs have argued that it is not their job to police the network. In previous court cases it has been ruled that ISPs are "mere conduits" of content.
Furthermore, they argue that under current plans anyone with unsecured home wi-fi could be held responsible if it were stolen by those intent on downloading music illegally.
They would face the penalties even though they might be unaware their network had been used for nefarious purposes.
The fact that the music industry would presume guilt rather than innocence is a step away from the due process of law in the UK, they say.
"The Mandelson scheme is every bit as wrong-headed as it is naive," said Andrew Heaney, director of strategy and regulation at TalkTalk.
"The lack of presumption of innocence and the absence of judicial process combined with the prevalence of wi-fi hacking will result in innocent people being disconnected," he said.
TalkTalk visited a street to prove stealing music was easy
In order to illustrate the point Matt Roxburgh, a security expert from TalkTalk, visited an ordinary street in Stanmore, Middlesex.
Within a couple of hours he had identified 23 wireless connections on residential street The Highway, which were unsecured.
He downloaded music files from two connections, including Barry Manilow's hit Mandy and the soundtrack to the 1992 film Peter's Friends.
In both cases, the residents had given prior permission to "be hacked" and the content downloaded was legal.
TalkTalk plans to offer advice to all residents about how to secure their wi-fi networks.
Which? Computing magazine has highlighted several cases where net users were wrongly accused of illegally sharing video games.
The British Phonographic Industry (BPI) remains confident that its "robust" evidence-gathering system will not allow innocent people to be caught in the net in the same way as has happened in the video game industry.
For those who have had their wi-fi connection hacked into, there would be no immediate threat of disconnection, said BPI spokesman Adam Liversage.
"The account holder would receive a notification in the first instance, which would represent an opportunity to discuss filesharing with others in the household and which would provide the account holder with the information and tools to help ensure that the account is not used illegally again," he said.
"This information would extend to explaining to the account holder how they can secure their wireless router to ensure that it isn't accessed by unknown third parties," he added.
But ultimately, householders will be held to account for what happens on their own networks, he added.
"The responsibility for ensuring that an internet account shared throughout a household is not being used for illegal filesharing clearly lies with the account holder," he said.
A statement from the Department for Business, Innovation and Skills said:
"We realise it's possible for mistakes to occur or for people to have their wi-fi connection hi-jacked. So it's important we have an independent and easy route of appeal at all stages in the process.
At the moment we envisage a tribunal system to which people would have recourse before any action was taken against them."
The government's decision is due at the same time as the draft Digital Economy Bill, which will appear alongside or shortly after the Queen's Speech to parliament in November.
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