The biggest water supplier in New South Wales has warned the expansion of an underground coal mine near a key drinking water catchment could result in an "unacceptable" loss of water.

Key points: NSW Government agencies at loggerheads over the Russell Vale coal project

NSW Government agencies at loggerheads over the Russell Vale coal project WaterNSW says expansion could result in "unacceptable" loss of 7.3 million litres of water per day

WaterNSW says expansion could result in "unacceptable" loss of 7.3 million litres of water per day Environment Department says that scenario is "highly unlikely"

The ABC has obtained a letter from WaterNSW revealing State Government agencies are at loggerheads over the potential impacts of the Russell Vale coal project located near Wollongong.

Wollongong Coal wants to push its operations further into the Lake Cataract catchment — one of the key water resources for the Illawarra and Macarthur, and a back-up reservoir for Sydney.

"It would be very, very foolish to say that the Cataract Reservoir is not important and therefore it doesn't matter if we lose some of the baseflow or the storage capacity to that dam or that we risk water quality impacts to that dam," University of NSW environmental engineer Stuart Khan said.

"By those sorts of impacts we would be risking resilience to the entire Sydney supply."

In the letter to the NSW Planning Assessment Commission, WaterNSW — the former State Water Corporation — raises serious concerns about potential issues including:

Drinking water loss

Drinking water loss Multi-million-dollar financial impacts on the agency

Multi-million-dollar financial impacts on the agency Conflicting water modelling estimates

Conflicting water modelling estimates Impacts to upland swamps

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WaterNSW is warning 7.3 million litres of water per day could be lost. ( ABC News: Billy Cooper )

Environmental experts say longwall mining underneath swamps can cause cracks, causing them to drain.

"They drain very quickly through the base — the base of the swamps is hard sandstone and when that is cracked they drain within days, within weeks," Wollongong hydrogeologist Dr Ann Young said.

"The swamps then continue to dry out and we know that the creeks near them dry out — what we don't know is whether that water re-emerges downstream.

"So it's a big risk that we're taking with our water catchment."

In a worst-case scenario, $22 million worth of water could be lost from the plan, according to WaterNSW.

The mine is expected to produce $23 million in royalties for the NSW Government.

Water loss would be 'negligible'

In a statement, Wollongong Coal said the expansion was also expected to contribute 300 jobs and $114 million of economic activity for the region and "any additional [water] licensing requirements will be met pursuant to the Water Management Act 2000 and in consultation with the NSW Office of Water".

The worst-case scenario also involves losing 7.3 million litres of water from the catchment per day.

In a report to the NSW Planning Assessment Commission, the Department of Planning and Environment (DPE) described this scenario as "highly unlikely" and having a "negligible impact on the overall water storage of Cataract Reservoir".

The NSW Environment Department said the mining project would have a negligible impact on water supply. ( ABC News: Billy Cooper )

The WaterNSW letter obtained by the ABC disputes this finding.

"WaterNSW disagrees with the DPE's assertion that the predicted extreme water loss is negligible," the letter said.

"Water loss of [7.3 million litres] per day is unacceptable to WaterNSW, particularly during dry periods."

Dr Young said there could be very large consequences from such water loss.

"That's … three Olympic swimming pools per day is the maximum possible loss," she said.

"It may be less than that, but what it does mean is we have a long-term, probably permanent loss of water to the catchment from that mine and other mines."

The NSW Planning Assessment Commission (PAC) is undergoing a second review of the merits of the mine and is expected to make its recommendation in a few weeks.

Project subject to 'unprecedented scrutiny'

In November 2015, the Department of Planning and Environment handed a report to the PAC recommending the mine go ahead, stating that it would provide economic and social benefits for the Illawarra region and for NSW as a whole.

"Following its consideration of the commission's report and Wollongong Coal's response, and the changes made to the recommended conditions, the Department is satisfied that the project is, on balance, in the public interest, and recommends that it be approved, subject to the recommended conditions of approval," the DPE's Addendum Report said.

In a statement, Wollongong Coal said it had taken a "conservative approach" to assessing the impacts of the project and that they had been subjected to "unprecedented levels of review and scrutiny".

"An integrated risk assessment of the project was carried out and overseen by an independent panel of experts, which determined that impacts to groundwater would fall within regulatory guidelines and that the overall level of risk associated with the project was acceptable," the company told the ABC.

WaterNSW said its concerns could be addressed through further conditions, but how these may affect the profitability and viability of the mine is not clear.

The company last year sacked 80 workers and placed the mine on care and maintenance awaiting the outcome of the PAC's review.

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