Certainly the fed's argument is a fallacy. They argued in court that the taxpayer should not have to pay end users (aka, farmers) for the government's choice to reduce water in order to save fish.
A short tangent: what happened to "life, liberty and property"?! FWIW, that phrase I just quoted was the one almost used instead of "...life, liberty, and the pursuit of happiness". It was changed at the last moment, just before the venerable document was signed. The founders of this country knew the importance of private property, and they knew that the government needs to compensate owners at fair market value when the government imposes an easement.
We're seeing a fairly rapid deterioration of that very, very important founding principle.
No, they don't. The demand for water for fish is an urban democratic claim on the use of a private asset. It's terrible environmental policy because it ends up being used for the profit of those wishing to use regulatory power to put their competitors out of business. That process distorts priorities, misallocates capital, and destroys the wealth that pays for environmental protection. Takings such as these devalue the resource to the point where land is abandoned and overrun with weeds and pests.