Legal Question in Construction Law in California

I don't know how your question got into the construction law category, unless perhaps you were wondering what "construction" a court would give your rental agreement! You'd probably get more and better answers if it were posted in landlord-tenant or a similar category.

Anyway, the starting point is to review your rental agreement to find out what it says about the water. Most rental agreements will make it clear whether the tenant pays for water or if it is included in the rent.

I did not find any law regarding a requirement for separate water meters.

Most leases either expressly or by implication do not allow the tenant to apply the security deposit to the final rent payment (because the security deposit must be maintained at the 100% level throughout the lease or rental term).

Whether the landlord's conjecture about the security deposit just covering the water cost is a little hard to swallow......that's either a lot of water or you've been there a long time. I'd ask for full documentation. The security deposit refund (or lack thereof) is supposed to be fully documented anyway. Also, it should be unnecessary to ask for the security deposit to be refunded as soon as possible. The time for refund (and accounting) is set by statute at 21 days (in most situations).

Withholding payment, or anything likely to land you in small claims court, would have an adverse effect on your credit rating if you lost, but probably not if you won. The landlord cannot bring an unlawful detainer or take other eviction action against you once you have given notice and surrendered possession.