Minister for the Environment and Water, Tanya Plibersek, said the government is awaiting the results of an independent review, before making a decision on the future of the project.
With the full business case yet to be released, she said the document does not provide the complete picture.
"The NSW government has released a summary of its own business case for Dungowan Dam, and the federal government has had no role in this business case," she said.
An independent Infrastructure Australia business case for the new Dungowan Dam is due to be released shortly, Ms Plibersek said.
"I will be awaiting the Infrastructure Australia report before expressing a view."
The state government business case revealed the project isn't the most cost-effective option to improve Tamworth's water security, and just 27 cents worth of benefits would be attained for every dollar spent on the scheme.
However, the government said it was the "best project for future proofing Tamworth's water supply without impacting the $2 billion a year agricultural industry".
Council's position unchanged
Tamworth Regional Council, who has been a supporter of the project from the beginning, says its position remains the same.
"Following the release of the Dungowan Dam business case summary to the NSW Parliament this week, Tamworth Regional Council's position remains unchanged," a spokesperson said.
"At this stage, council supports the new Dungowan Dam project, and believes the new dam will assist in relieving some of the major water security issues Tamworth and Moonbi Kootingal face.
"However, further work will be required in the years ahead to secure our water supply even if the new dam proceeds."
Tamworth mayor Russell Webb said the business case summary "reaffirms the need for a new Dungowan Dam".
"It clearly demonstrates that the proposed new dam would significantly reduce water security risks, and in fact nearly halves the risk of Tamworth running out water," he said.
Compared to the other shortlisted options - an increased urban reserve in Chaffey Dam, and a pipeline to the city from Keepit Dam - he said a new Dungowan Dam is "the best outcome for the residents of Tamworth".
A pipeline from Keepit Dam is "inherently risky, because Keepit Dam is a shallow dam which was down to 1 per cent at the last drought," the mayor said.
"There would need to be significant changes to the way water is managed in Keepit, which would dramatically affect water availability."
Water purification 'preferred option'
Alice Milson from the Tamworth Water Security Alliance said the business case summary was "disappointing" and showed a lack of community consultation with the people of Tamworth.
The report said "direct potable reuse" - using recycled water for town water - was assessed as an option, but didn't make the shortlist because the government assessed it as having "low community support".
However Ms Milson said she believes there is strong support for this option, and more innovative options for water security need to be prioritised, including purified recycling water, more storm water harvesting, and better recycling within industry to withstand the impacts of climate change.
"Dams worked really well when we had more reliable rainfall within Australia, and they worked really well when we could rely on El Nino and La Nina to be much more regular cycling," she said.
"We feel that now technology has moved past having a big bucket in the ground."
Commentary on dam 'insulting'
Member for Tamworth and Minister for Lands and Water Kevin Anderson believes a new Dungowan Dam is still the best option for future water security.
He said commentary from the Greens "criticising the dam saying it does not stack up financially actually says that we are second class citizens and are not worth anything".
"That's insulting to our community who did the heavy lifting and went through the very real pain of severe water restrictions to preserve as much water as we could in Chaffey Dam so that we didn't run out of water," he said.
"We all suffered the pain and the Greens say we are not worth it.
"The business case clearly says the recommended option, the New Dungowan Dam and Pipeline, is the only option that develops additional storage to improve water security and resilience to climate change for the Tamworth region."
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