This looks really interesting, but I'm curious about how you're supposed to play it to succeed.

Is it possible that the Dam you`ve built is at a too low level and he lets water in the lake and produces power ? Stop the game and rebuild the Dam at a higher level.
If this doesnt work you can use the Terrain Editor mod and pump out the remaining water.

Even with dams and pumps, the lake still filled up and my city flooded.