Australia's competition watchdog says a $5.1 billion deal made by the NSW government when it privatised Port Botany and Port Kembla is anti-competitive and illegal because it rules out Newcastle developing a rival container terminal.
The ACCC on Monday instituted proceedings in the Federal Court against NSW Ports - which now operates Botany and Kembla - over the agreement it entered into with the coalition government in 2013.
The deal contained provisions requiring the Port of Newcastle to compensate NSW Ports if it developed a rival container terminal allowing goods to enter NSW without passing through Sydney.
"We are alleging that making these agreements ... is anti-competitive and illegal," ACCC chair Rod Sims said in a statement.
Despite the state government's involvement, it is "not currently a party to the ACCC's proceedings and the ACCC is not seeking orders against the state".
Australian competition law only applies to the state government if it is "carrying on a business", which the competition watchdog suggests NSW wasn't when it leased the ports.
Nevertheless, Mr Sims was scathing of the government's approach.
"I have long voiced concerns about the short-term thinking of state governments when privatising assets and making decisions primarily to boost sales proceeds, at the expense of creating a long-term competitive market," he said.
"These anti-competitive decisions ultimately cost consumers in those states and impact the wider economy in the long term."
The deal essentially means that the Port of Newcastle - which was privatised in 2014 - can't develop a container terminal for 50 years.
The ACCC wants the Federal Court to find that the 2013 and 2014 deeds contravene the Competition and Consumer Act.
The watchdog is seeking injunctions restraining the operator of Port Botany and Port Kembla from seeking compensation from Newcastle as well as pecuniary penalties and costs.
Mr Sims later told reporters the court case could take one or two years.
"The stakes are very high," he said in Sydney.
"Wouldn't it be great if we had competition between ports as they do in New Zealand (where ports) are much more efficient and cheaper than ours."
Premier Gladys Berejiklian said the government stood by its decisions.
"Obviously the ACCC is doing its job and we look forward to the outcome," she told reporters.
NSW Ports believes the 2013 agreement was in the best interests of stakeholders, the community and the economy.
"NSW Ports will be vigorously defending the proceedings," a spokesman said in a statement.
The ACCC has previously told AAP that while it had concerns about the privatisation of NSW's ports they were "largely hypothetical" until Newcastle stated earlier this year it wanted to develop a container terminal.
Australian Associated Press