Mackenzie District mayor Graham Smith said he would call for an inquiry.
He said an electrical fault occurred at the town's water treatment plant overnight
and the computer which managed the plant shut down about 2.30am.
Mr Smith said the problem could not have happened at a more inopportune time, with a number of council staff away on holiday.
A contractor had identified the cause, and while not fixing it, had bypassed the problem and treated water delivery was restored, he said.
The people who should have been told immediately about the problem were not, Mr Smith said.
He found out about it at 8am when a Twizel resident called him.
Treated water was flowing by about 11am, he said, but what the whole exercise did was alert the council to a ``huge problem''.
``I'll be seeking an inquiry as to how this came about, why it happened, why we weren't alerted to the problem earlier.
``I'm disappointed it happened.''
Poppies Cafe manager Lorna Borick said her cafe was filled with people from all over town in the morning because of the water situation.
``In some ways it was good, but obviously the coffee machine relies on water pressure and one of the things people expect on a Sunday morning is coffee, so I turned people away. It was disappointing for Queen's Birthday weekend. It's the last big weekend before we shut down.''
She said the one thing the council could improve was its communication with the public, given the first official notice she saw was on Facebook.
She had been up at 2.30am with a sick child and could not get any water and did not know why.
High Country Lodge and Backpackers spokeswoman Stevie James said guests filled her reception early with queries about why they could not flush their toilets or use showers.
She said guests were understanding when they heard the entire town was affected by the impromptu water shortage.
``I thought people would be quite angry about it, but they were OK.''
Mr Smith expressed his apologies to the town of Twizel for the inconvenience caused.