Springvale coal mine, operated by Centennial Coal and located beneath the Newnes State Forest in the Blue Mountains, was granted a 13-year extension last year by the independent Planning Assessment Commission (PAC).

The mine discharges untreated wastewater into the upper Coxs River, which flows through the Blue Mountains World Heritage Area and is the second-largest source of water for Sydney's main reservoir at Warragamba Dam.

Under laws introduced in 2009 and incorporated in a statewide planning policy in 2011, developments in the Sydney water catchment cannot be approved unless the consent authority is satisfied they have a "neutral or beneficial" effect on water quality.

In the first case to test the laws, the NSW Environmental Defenders Office argued on behalf of non-profit group 4nature that the PAC could not have been satisfied the Springvale coal mine extension met this requirement.

But Land and Environment Court judge Rachel Pepper upheld the validity of the approval on Tuesday, prompting environment groups to question the effectiveness of the laws.

Andrew Cox, president of 4nature, said an appeal had not been ruled out.

"There is something seriously wrong with our laws that are meant to protect our drinking water catchments," Mr Cox said outside court.

"We'll be looking really closely to see if there are any legal avenues for us."

Justice Pepper said the PAC had applied the correct legal test and the court could not determine for itself whether the project would as a matter of fact have a neutral or beneficial effect on water quality.

The court was confined to ruling on whether the PAC had reached an "independent state of satisfaction" that the project would have this effect.

The main concern expressed by environment groups was the high salinity of untreated wastewater discharged by the mine into rivers feeding into Sydney's water catchment. The water also contains metals and other materials.

Justice Pepper said the fact there was material before the PAC that could have led to a different decision, namely modelling predicting the project could increase median daily salinity at water discharge points, did not mean the view it took was "not reasonably open to it".

She noted that "misleading or inadequate advice or modelling" furnished by the planning department or any other body to the PAC would not necessarily invalidate a decision.

Keith Muir, director of the Colong Foundation for Wilderness, said the decision proved the policy was "not worth the paper it's written on".

But Centennial Coal's executive general manager for external affairs, Katie Brassil, said the PAC had imposed "rigorous performance measures for discharge water" on the mine, which provides coal for the nearby Mount Piper power station.

She said the decision "secures the livelihood of our local community while we also continue to supply the state's electricity needs".

The NSW Environment and Protection Authority is prosecuting Centennial Coal over a separate incident at its Clarence Colliery, involving a spill of coal waste and water into the Wollangambe River flowing into the Blue Mountains World Heritage Area.