Anglian Water wants to block people from moving into new build houses in parts of Norfolk until 2030 - because its treatment plants cannot cope with any more homes.
The water company says its plant at Whitlingham, on the edge of Norwich, is already at capacity and will not be able to deal with any extra sewage.
It has called for Norwich, Broadland and South Norfolk councils to impose planning conditions that would prevent people moving into newly-built homes until significant upgrade work is done at the site – which might take until 2030.
However, the councils have told Anglian Water they are not prepared to do this and intend to continue approving planning permission for new homes.
Phil Courtier, senior planning officer at South Norfolk and Broadland councils, said: "We immediately said that we could not have this condition.
"Environment Agency modelling of the additional homes likely to be built shows there would be a negligible impact on the environment.
"We estimate that, of the 13,000 new homes likely to be granted planning permission in the next three years, only about 1,000 would be occupied before the Whitlingham upgrade is due to be complete.
"We argue that is such a small impact as to be negligible."
The councils have joined forces to come up with a 'position statement', making it clear they will carry on approving planning applications despite Anglian Water's demands.
But officers will nevertheless assess risks and could ask developers to carry out an extra assessment if the volume of wastewater would result in "significant risk of harm to the environment".
Where they believe the balance is in favour of development, they will recommend approval for housing schemes.
The councils have brought in Leeds-based consultants Sweco to pull together further evidence, to fend off any potential legal challenge.
They have not revealed how much they have paid to commission Sweco.
Anglian Water says its request is "the environmentally responsible" thing to do.
A spokeswoman said: "Our region is one of the fastest-growing in the country, with 720,000 new residents expected by 2043.
"Under the Water Industry Act, a site with planning consent has an automatic right to connect new homes to our water and sewerage networks and, as a water company, we are not a statutory consultee in the planning application process.
"Therefore we don’t have powers to prevent connections from new housing.
"However, in order to ensure we’re protecting the environment, we do need to take into account the capacity we have available in growing areas.
"In locations where additional homes would exceed existing capacity and be a risk to the environment, we may object or request that the local authority put a condition on the planning application to give us time to complete upgrades.
"We’re spending £280m in the next five years to upgrade our wastewater treatment capacity.
"But at some locations we’re at or beyond our water treatment capacity, which it’s why it’s vital for us to work with developers and local authorities at an early stage, to make sure we have the time to ensure our infrastructure is ready to support the region.
"We feel that the environmentally responsible thing for us to do is to highlight where development poses such a risk to the environment.
"We do have capacity to accommodate growth within our region and we are working with local planning authorities to identify the most sustainable locations for growth."
While the Whitlingham issue relates to the area around Norwich, Anglian Water has also raised concerns about capacity in other parts of Norfolk.
It completely objects to further development in various west Norfolk locations - including Burnham Market, Middleton and Heacham.
And the company says it is prepared to seek similar planning conditions in areas where it says systems cannot cope.
It comes after the company was taken to task over how it is going to cope with growth proposed for neighbouring north Norfolk.
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