"A lot of people who paid water charges aren't expecting refunds. What they want is fairness and equity to ensure that if they pay what they owe, others do the same," Mr Coveney told the Irish Independent.
He said he "won't stand over a situation where people who paid are made a fool of because they did the right thing".
However, a Fine Gael party meeting was last night dominated by the issue, with TDs expressing fears that they would never be forgiven if refunds were not issued.
Finance Minister Michael Noonan said the party has lost votes over water and it was time to "get this dead cat off the field".
He said that the €120m a year required to pay for water charges is "not significant" given that the State's budget is €58bn.
The split came as Fianna Fáil's Barry Cowen described Mr Coveney's reaction to the Expert Commission on Water's report as "rushed" and "a bit irrational".
His party now wants an assessment carried out to see if it would cost more to issue refunds - which would average €165 per household - or to pursue those who haven't paid.
Some 989,000 households did pay some or all of the money owed, with the utility collecting a total of €162.5m.
This means more than 500,000 people ignored all five bills received from Irish Water before charges were suspended in May.
The Irish Independent has learned that no effort has been made to encourage or force these people to settle their debts since the formation of the Government.
"Irish Water has not communicated directly with customers regarding their bills since the suspension of domestic charging," a spokesperson confirmed.
Labour Party TD Willie Penrose is set to table legislation that if passed by the Oireachtas would force Irish Water to give billpayers their money back.
Failing that, Mr Penrose, who is a barrister, is prepared to put together a legal team that would lead a class action in the courts.
"It's important that a situation is not created where compliant taxpayers are left feeling mugged," he said.
Mr Coveney said the way forward would have to be decided by the Oireachtas Committee which would study the Expert Commission report.
"If you have a charge or a tax that is national policy and the law then I think it's a very dangerous precedent to simply set that aside because it's an awkward political issue.
"People who didn't pay should be asked to pay. We need to design a system that can allow them to do that over time and that doesn't put anybody under financial pressure," he said.
But at last night's meeting junior minister Catherine Byrne was said to have become emotional as she demanded that refunds be paid.
Dublin Fingal TD Alan Farrell warned the party would lose votes if it did not issue refunds.
Meanwhile, Fine Gael and Fianna Fáil are also assessing how to react to a section of the report which states that people in group water schemes and with private wells need to be compensated.
"Equity with the proposed arrangements for consumers on public supplies must be maintained for those who are not served by public water supplies," it stated.
Mr Coveney suggested that Brendan O'Mahony, who is chair of the National Federation of Group Water Schemes and was on the Expert Commission, should be invited to appear before the special Oireachtas committee on water.
"Many people in rural Ireland have always paid for water and the infrastructure they might need. Let's see what the committee come up with on that," he said.
Source: Irish Independent
