Sounds like this thing is pretty far along.
Obviously, we need to be careful about giving "free" advice without knowing all of your details, but some things seem important to me.
Do you still have any information about the County water & soil people who came out six years ago and told you that you didn't need a permit.
I would try to find the name and number of anyone you dealt with and any paperwork you had. Even notes about any conversations you had with them, and/or dates may have relevance.
Another important point (I think): If they came up with a dollar amount that you have to pay, I would guess that they are not going to tear down your dam if you buck up. And, if they've given you a number ($10/ft, or $7,000), that means negotiation (to me anyway). Basically they've burped and given you the high end vasoline need. I'm not sure on this, but it may be a good idea to get them to give you that in writing (comments anyone?).
If my thought process is right, then an option is to get a good attorney and negotiate a settlement, but you could spend a few grand with a good attorney depending on the amount of back & forth that happens.
I still do feel that now is the time to go the the US Senator's office. They should help you for free, but donating $500.00 (more or less) will really get them fired up.
