IMO the water thing is a distraction. It gets people quibbling over water instead of asking bigger questions about the data center.
Fresh water supply has been on a downward trend for years. We are already looking at a future without enough fresh water, before the new datacenters come into play. The datacenters are being installed in some of the driest areas of the country that were already water stressed. In some cases they can also contaminate local water systems.
Mostly, but not entirely. It is a huge issue in the Southwest, and it seems like a lot of DCs are being proposed and/or built in areas where water is far from abundant.