Dwindling water supplies could lead to further restrictions on development in Cambria and Los Osos.
The California Coastal Commission wants to halt all development that leads to increased water use.
This would apply to both vacant lots and existing properties.
"We were aware of the conversation about water issues and water resources in Los Osos, but we were not prepared for what was in the letter," said Ron Munds, general manager for the Los Osos Community Services District.
The California Coastal Commission is issuing strict new recommendations to both the Los Osos and the Cambria community services districts.
In a letter, the commission states that, "there is insufficient water supply to serve even existing development in Los Osos without coastal resource harm, let alone adding to it new water using development."
"Essentially, it does sound like they are trying to shut down all development either on existing properties or existing lots," said Munds.
The California Coastal Commission is recommending that San Luis Obispo County stop accepting applications for developments that cannot show evidence of adequate water supply, adding that it gives "false hope" that leads to application denials.
The guidance would apply to guesthouses or any large-scale expansions that lead to more water use.
"There are a number of assertions in the letter. Some we agree with, some we have an argument with," said John Weigold, general manager for the Cambria Community Services District. "So, one of the first things we need to do is come to an agreement on the findings of fact."
The Cambria CSD is disputing some findings.
The Coastal Commission stated in the letter that, "they (the district) appear to already be extracting water currently in excess of that allowed by the commission, which is a Coastal Act violation, that is leading to severe impacts, including to listed sensitive species in Santa Rosa and San Simeon Creeks."
Water officials in Cambria, however, say they are closely monitoring how much water they pull out of aquifers, and are not using more water than allowed.
Both districts are now working with the county and the Coastal Commission to find a solution.
This all comes as Central Coast communities continue to grow and change with water conservation in mind.
"I think Cambria is going through a period of time right now, as is the whole Central Coast for that matter," said Weigold. "We have a lot of second homeowners that have moved into the area and bought up a lot of homes. That's changing the dynamic of the makeup of our customer base, how we use water, and that all has to be factored in for the future."
The Los Osos CSD says it will enforce current policy until they get clearer guidance.
"We reached out to the San Luis Obispo County Planniing Commission and the California Coastal Commission for comment. The planning commission didn't have anyone available and we didn't hear back from the county.