MALPAS Dam sits at less than half its capacity and there are fears the city of Armidale has less than a year's supply of water left.
Armidale Regional Council CEO Susan Law said with the dam at 48 per cent and water tankers supplying Guyra, council was treating it as a crisis situation.
"We have elevated it in priority in terms of where we put our resources, both financial and people, because it is becoming pretty urgent that we can do the best we can to resolve the lack of water situation," Mrs Law said.
"At the moment staff are identifying the people we need to help us look for alternate sources of water supply, which is likely to be underground, and writing the brief for them to do that work."
Mrs Law said experienced hydrologists were in short supply because many other areas of NSW were in a similar or worse position.
She said the one thing that could make a big difference to the situation, short of a lot of rain, was people modifying their water usage.
"We are still using significantly more than the state average, and if we got towards the state average of 145 litres per person, then that would make a big difference," she said.
Mrs Law said residents of Armidale could expect to see water restrictions go to a different level soon.
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Armidale mayor Simon Murray said part of council's problem was that it was now entering an unknown situation.
"The lower Malpas Dam gets and the quality of the water deteriorates, it might get to a point where we can't treat it," he said.
"The question is, we don't know what the quality of the last 25 per cent of the water is going to be like.
"So, we haven't got 50 per cent [left], we've got less than that. We've got potentially 25 to 30 per cent of usable water less. We just don't know what that bottom silt is going to be like."
Northern Tablelands MP Adam Marshall has been pushing for the Malpas Dam wall to be raised a further five metres, which would double its capacity. However, council is focused on the immediate issue of seeking an alternative source of water supply for next year.
Cr Murray thinks the fact that Guyra and Armidale reservoirs have the same catchment could be better used to supply water to this region.
"Rather than extend the wall of Malpas Dam, we should get funding from the state government to build a very big dam, just where our present reservoirs are," he suggested.
"Or multiple, smaller ones that we could link together would be better."