The Colorado River is expected to only carry 43 percent of the average amount of water into Lake Powell this year.
Officials in Colorado, New Mexico, Wyoming and Utah, who accused the Central Arizona Project of manipulating the water at the expense of others.
The agreement includes spending millions of dollars on conservation projects and drawing up plans to deal with drought and climate change.
Lawmakers passed a bill in 2013 allowing for graywater use in Colorado, but the practice has gone virtually nowhere.
The utility says it may have been a good snow year but conservation is still needed.