In my experience Aguagest are the epitome of a un-thinking, stubborn greedy bureaucracy that you increasingly encounter these days. In Spain I think they teach bureaucratic intransigence as a subject in school. They will play upon the fact that you need to have your supply re-instated and will let you wear yourself out with phone calls and emails knowing that you're likely to throw in the towel after a while.
I reckon to beat them you have to be even more bloody minded than they are and I would suggest go and confront them at their offices. But not in a hostile way, just keep on repeating the facts and your demand that they waive the fine. I had a similar situation 3 years or so ago and sat there for over 2 hours arguing the case, going round in circles but not showing my annoyance. I didn't realise it at the time but I think we only reached a reasonable compromise as we were getting close to his lunch break.
If you have to make a payment that is unreasonable make it under protest in writing. This will give you the right to continue the debate and perhaps bring in other people later on. But you need to be prepared to sit at the guy's desk and keep repeating your case until the cow's come home - and let them know you are there for the duration.
Whilst they might have some powers, their case is not water tight (bad pun). They are guessing, presumably they cannot prove there was any intention to defraud and they cannot prove any loss of water. Possibly the damage was caused accidently by a collision. I would get all these arguments together with some photographs to show that they were remiss in siting the meter where they did and tell them it was their fault etc You might want to get copies of the flight details, old tickets to show that the neighbour was not in Spain. Sometimes pieces of paper and photographs are taken more seriously than just words.
Someone else may have more meaningful legal advice, but I hope this helps.