In a report to State Parliament yesterday, Peter Achterstraat highlighted the increase in the dam's cost estimate from $342 million to $402 million since its announcement in 2006, and advice from Hunter Water that the Government was not expected to formally approve the dam until "at least" April 2010.

Mr Achterstraat reported he had written to Hunter Water in September of his intention to audit the business case "used to justify the decision to proceed with the Tillegra Dam".

But Hunter Water advised later that month that Planning Minister Kristina Keneally was not likely to decide on the project until April 2010.

Mr Achterstraat wrote in the report that he would consider then whether a performance audit was appropriate, but that a "sound" business case should be prepared before the decision was made.

The Auditor-General's executive officer Barry Underwood said yesterday it would be inappropriate to detail at present why the dam proposal warranted an audit, beyond that the project was of "significant public interest".

He said the subject of any audit could be selected from suggestions to the office, media reports, as well as the office's own research as part of its "watching brief".

Greens MLC John Kaye said the report was a warning to the Rees Government, which would struggle to justify the project and faced the release of an embarrassing audit possibly just before the next election.

"No amount of spin will disguise the awful truth that Tillegra is unnecessary and will hang an economic millstone around the necks of Hunter residents for a generation to come," Dr Kaye said.

A spokeswoman for Water Minister Phil Costa said the development of the Tillegra proposal had been detailed and included numerous reports which supported the case and the statistics used to determine the need for the dam.

An environmental assessment would complete the project's business case.

The Planning Department was considering the project's environmental assessment which completed the business case.

"A project of this scale could not be approved or built without a solid business case for it," she said.