The development comes just three weeks after Wannon Water gave its clearest signal yet that it favoured a desalination plant to fix Port Fairy's unpalatable drinking water supply.

In late August Wannon Water's board signed off on a $16 million funding allocation to fix the drinking water in Portland, Heywood and Port Fairy. While a water treatment plant is the only option to address the water supply in Portland and Heywood, Port Fairy has the additional option of hooking into the Warrnambool and Koroit water supply, which is pumped up from the Gellibrand River.

The Port Fairy Pipeline Supply Support Group has been pushing for a pipeline and presented a petition to Mr Tehan on Monday with 2100 signatures from Port Fairy locals and visitors.

But when Wannon Water managing director Andrew Jeffers announced the board's $16m investment in the project, he said "our preferred option is to have local treatment at the water treatment plants in all three towns".

Mr Jeffers said Wannon Water had "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 linking Port Fairy to the Warrnambool supply would put added strain on the system.

The water authority released an Urban Water Strategy on August 26 outlining concerns about a 30 per cent drop in Gellibrand River flows by 2055 under the worst case climate modelling scenario.

Mr Konings said Wannon Water hadn't taken into account the environmental benefits of a pipeline, which he said would allow Port Fairy's sewage treatment plant to recycle its effluent for use on local parks and gardens, rather than pumping it out to sea.

"There is no other town in Australia the equivalent size to Port Fairy that has installed a desalination plant like the one proposed... just to improve water quality," he said.

Mr Tehan said the Port Fairy community was "united in support of a pipeline" and he was "perplexed" that Wannon Water wouldn't sit down with the pipeline support group. He said the community support for the pipeline option was "incredibly significant" for the business case.

He said he had written to federal Environment Minister Tanya Plibersek about the project and Ms Plibersek had replied to say the federal government would consider the proposal, but only if it had the Victorian government's backing.

"With state government support there is a pot of money there for projects like this," Mr Tehan said.

He said there was also precedent for federally funded pipeline projects in Wannon, with one in West Wimmera a decade ago and another in East Grampians within the past five years.

Mr Tehan said he would be presenting the petition in federal parliament to lobby support for the pipeline.