The Wannon Water board approved a $16 million investment for the first stage of the project, which will improve the unpalatable drinking water in Portland, Heywood and Port Fairy.

The funding falls well short of the $33 million cost estimate for the project, with Wannon Water managing director Andrew Jeffers saying the authority didn't have the money to fully fund it at the moment. He said the first stage guaranteed new infrastructure in at least one town.

"We'll continue to seek and advocate for additional funding so the full program can be delivered in all three towns as soon as possible," he said.

Mr Jeffers also gave the clearest sign yet that Port Fairy was unlikely to get the pipeline many in the small town, including a vocal advocacy group, had been demanding was the only "acceptable" option.

He said while a pipeline was still a possibility for Port Fairy, "our preferred option is to have local treatment at the water treatment plants in all three towns".

Wannon Water is walking a fine line funding new projects as it tries to prevent water bills from skyrocketing over the next five years after falling for four consecutive years until inflation hit in late 2021.

Mr Jeffers said connecting Port Fairy to the Otway system that Warrnambool uses would be more expensive and be worse for the environment than a desalination plant to remove mineral salts from the existing groundwater supply.

"We've actually been working hard in the past few years to reduce our reliance on the Otways to support the health of the Gellibrand River and to reduce the carbon emissions from pumping water such large distances,"he said.

John Konings of the Port Fairy Pipeline Supply Support Group said he had commissioned technical studies that contradicted Mr Jeffers' claims.

"We certainly refute the claim the pipeline option is more expensive, our information shows it's likely cheaper than a desalination plant," Mr Konings said.

"The pipeline option also gives significant environmental benefits in its potential to stop treated sewage from being discharged into the ocean and allowing it to be recycled for use in irrigation."

Mr Konings said PFPSSG had presented all its technical information to Wannon Water, but the authority hadn't provided any data to back up its own claims about affordability and environmental effects.

"It's disappointing that they still seem to be favouring the desalination option, because we see it as far inferior to a pipeline."

He said a petition with more than 2000 signatures was proof that many if not most Port Fairy residents also wanted a pipeline and PFPSSG wouldn't be dropping the issue.

"We will still be pursuing the pipeline case and pressing Wannon Water to adopt it," he said.