At least five rural property owners, including farms, have been taking between 5 and 20 per cent of Pahiatua's treated water supply without making any payment.
Tararua District councillor Alison Franklin has warned there is likely to be a backlash from residents after years of frustrations over the limited water supply.
"Pahiatua residents have had years and years of water restrictions, summer after summer. People have been going to the stadium to get water from a tanker while this has been happening," Franklin said at the council's monthly meeting.
"There's going to be a backlash."
The Balfour water line historically fed the Pahiatua township in emergencies from a water source on the southern end of town.
Due to risks from untreated raw water, mixing with the treated water, the source was shown as abandoned in council's water safety plan. However, water has been flowing down this line feeding properties which were not metered.
This flow hasn't shown as council supply and water is flowing without backflow prevention devices installed.
The council has sent a letter to those affected with new terms on water supply, but district councillor Peter Johns said this was being heavy-handed.
However, the council's chief executive, Blair King, said he wasn't willing to draw the situation out and make it bigger than Ben Hur.
"As a council, we've a situation where we have to stay within limits set by Horizons Regional Council," he said.
"In a couple of months from now in the middle of a drought, we don't want these guys not paying anything. What would people say if I waived a whole lot of charges?"
A report to council said it was not feasible to continue supplying unrestricted water from town, as the river source for Pahiatua is approaching the first step-down for council's water take resource consent from Horizons.
Ernie Christison was also concerned about the implications.
"Woodville has been in crisis for a long time and now we are saying we are giving water away," he said.
"We're selling water too cheap anyway."
Councillor Andy Thompson agreed council couldn't continue with a long, drawn-out process.
"We have to do what's right, but it's not easy," he said.
Johns suggested calling a meeting with those concerned as a follow up to the letter which has been sent.
And Tararua District Mayor Tracey Collis has a warning for residents.
"If there is anyone else out there in this position, let us know. This isn't an isolated situation."