The 2003 agreement with the corps would give Georgia about a quarter of Lake Lanier’s capacity over the coming decades and is the foundation of Georgia’s long-term plans for supplying drinking water to the rapidly growing Atlanta region.

Under the Settlement Agreement, up to 240,858 acre-feet of Lanier would be set aside for water storage: 175,000 acre-feet for Gwinnett County, 20,675 acre-feet for the city of Gainesville and 45,183 acre-feet for the Atlanta Regional Commission.

Alabama and Florida challenged the pact, arguing that Georgia doesn’t have any legal right to the federal reservoir, which was initially built for hydropower. The withdrawals would dry up river flows into the two states that support smaller municipalities, power plants, commercial fisheries and industrial users such as paper mills.

In an odd twist, the state of Georgia — along with municipalities that withdraw water from Lanier, including the city of Gainesville — was on the same side as the corps in this suit, which is one of seven active suits in three different federal courts over the Apalachicola-Chattahoochee-Flint and Alabama-Coosa-Tallapoosa basins.

A district court earlier ruled in Georgia’s favor, but the U.S. Court of Appeals in Washington overturned that decision Tuesday, saying that the agreement constituted a major operational change at the reservoir, which requires congressional approval.

The agreement, which is at the center of the dispute, was a 10-year contract that also compensated hydropower users for any lost power generation because of water storage.

The district court first approved the settlement agreement on Feb. 10, 2004. An earlier appeal was dismissed. The case returned to the D.C. circuit in 2007, where oral arguments took place Nov. 16. The parties have the right to appeal, either to the entire D.C. Circuit Court of Appeals or to file an appeal to the U.S. Supreme Court.

Bert Brantley, a spokesman for Gov. Sonny Perdue, said the state’s position on water storage previously had been upheld by the district court.

"They had a strong basis for concluding that the corps has the authority for water storage contracts," Brantley said. "We argued the case because we thought it was the right way. But in a grander context, it certainly does not change the need for the three governors to come to some long-term agreement."

Brantley said Tuesday’s ruling does not stop Georgia from pursuit of an agreement between the three states.

"It’s not an impediment from our side. We’d rather solve this around a negotiating table than in a courtroom," he said.

He said a number of meetings have been held on technical issues between representatives of Georgia, Florida and Alabama, but declined to speculate if an agreement would be ready by mid-February, the timetable that was initially announced by U.S. Interior Secretary Dirk Kempthorne. Kempthorne is credited with bringing the governors back to the negotiating table after talks broke down in October.

"(Tuesday’s) court ruling does little to resolve the major questions on the table," said Chick Krautler of the Atlanta Regional Commission. "The court did not decide whether water supply is among the authorized purposes of Lake Lanier. What the court did is to invalidate a settlement agreement that resolved a dispute between the water supply providers and the hydroelectric customers about the price paid for water supplied by Lake Lanier."

In Alabama, however, the ruling was hailed as a great victory.

"This is the most consequential legal ruling in the 18-year history of the water war, and one of the most important in the history of the state of Alabama," Alabama Gov. Bob Riley said. "It establishes that the decades-old practice of Atlanta taking more and more water from the federal reservoirs in the Coosa and Chattahoochee rivers without any legal authority to do so will not stand."

Alabama and Florida argued in their appeal that the corps does not have the authority to reallocate the storage in Lake Lanier from hydropower to water supply. The two states contend that drinking water supply is not one of the authorized uses for Lanier.

Meanwhile, Tuesday, the Gainesville City Council approved a payment of $150,000 to the Atlanta Regional Commission for its portion of the legal defense of the suits. The Atlanta law firm of King and Spalding is representing the group that includes Gainesville.

Florida Gov. Charlie Crist’s office and the Florida Department of Environmental Protection did not return phone messages seeking comment.