Water rights are a huge deal out west.
So, yes, in many places, you don't "own" the water that falls on your property.
Especially in regards to the Colorado River watershed. I would be violating city and state laws if I did the same here in Mesa, AZ.
That being said, if this is true:
Apparently, once upon a time, the state did indeed allow Harrington — code name: “Rain Man" — to collect water in his reservoirs. However, officials reversed their decision the same year, 2003, that the three permits were issued, citing a 1925 law that states the city of Medford holds all exclusive rights to "core sources of water" in the Big Butte Creek watershed and its tributaries.
I believe that any government reversal of decision is much like attempting to prosecute an ex-post-facto legal situation.
He had hundreds of man hours in commercial equipment use, plumbing and pumping infrastructure and other investment tied up into a permitted behavior. Then the goobermint comes along and says, "nah, we changed our mind. Eff ewe, and take down your dams."