Whitehaven Coal faces prosecution for allegedly taking water at its Maules Creek mine over a three-year period, without a licence.
The Natural Resources Access Regulator (NRAR) on Thursday announced it had started a prosecution of the mine in the NSW Land and Environment Court for the alleged breaches of the Water Management Act.
If found guilty, Whitehaven Coal could be forced to pay up to a $2,002,000 fine for each alleged offence.
The state's independent water regular alleges Whitehaven failed to divert clean water from major streams on the site, instead capturing the water on the mine site, near Boggabri.
The alleged offences, which occurred during the region's worst ever drought, would have had an impact on other water users, according to NRAR Chief Regulatory Officer Grant Barnes.
"As this matter is now before the court, NRAR cannot comment further on the case," he said.
A spokesperson for Whitehaven said the company had already addressed some aspects of the NRAR investigation, which they said had been under way since 2018.
They noted the "complexity of the water management system in NSW" and said some of the alleged non-compliance concerns practices common in the NSW coal mining sector.