The move comes three months after Mr Kelly wrote to the troubled council demanding it show cause why its planning powers should not be removed after he revealed it was the most complained about council in NSW with a history of delays in dealing with rezonings and development applications.

Cessnock mayor Alison Davey said yesterday she had expected the news, but that it was "a blow we didn't have to have".

"I think some of the justification is stretched, I think he's [Mr Kelly] saving face."

The decision puts projects, such as a 14-unit residential development in Chidgey Street, Cessnock, and the future of The Vintage and Nulkaba residential sites, in limbo.

Yesterday, Greens MLC Sylvia Hale called on the council to challenge the legality of Mr Kelly's decision.

The panel, appointed for five years with its operations to be reviewed after two, will exercise the assessment and determination of development applications with a value of more than $100,000, which remain undetermined 90 days after being lodged and the amending of local environmental plans (assessing and determining rezoning proposals).

Mr Kelly said the department had serious concerns about the council's ability to exercise its planning role in a timely and effective manner.

He said the department was "unconvinced" with the council's response to show it was on track to deliver efficient planning.

Cr Davey, who received a letter from Mr Kelly about the panel yesterday, said the move would cost the council $120,000 a year to pay panel members.

"There will also be associated costs such as travelling," she said.

Cr Davey said the council had wanted to consult with people over local environment plans and that took time.

"We wanted to be more consultative and that's a good thing," Cr Davey said.