The Santa Clara Valley Water District alerted cities and companies last week that it was reducing allocations of treated drinking water by 20 percent through the end of the year, the San Jose Mercury News reported on Monday.
The seven cities and companies that were notified provide water to about 1.5 million people.
The cities, including San Jose, will now be forced to make up for the lost water by pumping more groundwater, urging residents to conserve or using other water sources.
"It's definitely a cause for concern," said John Tang, a spokesman for the San Jose Water Co., a private company that delivers water to a million residents in and around San Jose. The company gets water from the Santa Clara Valley Water District.
"We want people to use water judiciously and heed the call for conservation so we can make it through this year," Tang said.
Tang said San Jose Water will make up its 20 percent reduction by pumping more groundwater and asking for conservation.
The cutback came as California is in the midst of its third consecutive dry year. Gov. Jerry Brown declared a drought emergency in January.
In part, the Santa Clara Valley Water District cuts are due to larger statewide reductions.
The Silicon Valley started 2014 with normal groundwater levels after two dry years, the district said. But continuing dry weather, minimal runoff in reservoirs and low allocations from the California State Water Project limited surface water supplies. As a result, the district is reducing the amount it banks in underground aquifers.
In addition, about 100 farmers, golf courses and other property owners won't be allowed to use the untreated water they typically have access to.