The state government is warning it will "intervene" if Dubbo Regional Council does not have the "capabilities" to ensure water keeps flowing in the city after Burrendong Dam runs dry, potentially in mid-2020.
In June the government gave the council $30 million to expand the city's bore field and boost groundwater supplies.
NSW Water Minister Melinda Pavey argues "it is likely the most effective way to deliver an alternative supply to Dubbo in the time frame available".
On Monday, she fired off a letter to Dubbo Regional mayor Ben Shields.
It urged the council to proceed with the bore field project as "rapidly as possible" and referred to government "levers that would restrict water in Dubbo" if its water restrictions did not increase.
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Ms Pavey confirmed her approach to the council when contacted by the Daily Liberal.
"I have written to Dubbo Regional Council to urge them to increase their water restrictions and determine whether they have the capability to complete the $30 million project," the minister said.
"My priority is the people and businesses of Dubbo.
"If the council doesn't have the capabilities to deliver the project, the NSW government will intervene."
On Monday night the council opted to introduce level three water restrictions on October 1 and level four restrictions on November 1.
On Tuesday council's chief executive officer Michael McMahon said it had long been considering increasing water restrictions.
"Council decided not to jump immediately to level four water restrictions in order to help the public identify how they can save water in their own homes," he said.
Mr McMahon reiterated that the council was currently using about 10 per cent or less of water released from the dam and extracting "well below its entitlement" of groundwater from the Upper Macquarie alluvial aquifer.
He said since January the council had been working towards the drilling of extra bores, effluent reuse, storm water harvesting, backwash water reuse, interconnecting pipelines for new water sources, and a campaign aimed at helping the community conserve water.
"Council is also reassuring the communities within the local government area that their tiers of government are working effectively and in a unified manner to address this very real risk to human health," Mr McMahon said.