A $1500 fine and a month in jail is hardly cruel or unusual.

I feel it's excessive for collecting what is essentially free.

Then you don't have an inkling on the history of water rights laws in the US. Start with http://en.wikipedia.org/wiki/Water_right . It sounds like you want to structure this purely monetarily, so think of it this way. The water already had downstream uses, and diverting the water to fill ponds affects those users, and likely negatively. Using a first-come, first-serve accounting method leads to increased risk. Suppose Las Vegas decided to let Lake Mead fill up, which ensures more water and power available for Vegas. Then there's less water available for Southern California, and a farming disaster.

The south-western states settled this specific problem via the Colorado River Compact (though there are problems as well with the compact). However, do you really expect everyone upstream and everyone downstream to work out an agreement on how the water will be used? That's extremely expensive.

Instead, there's (in this case, long-settled) law on what people can do with the water. As hudibras pointed out, this law has been around long enough that its effect has already been factored into the cost of the land, taxes, etc.

What legal principle do you want in place instead of what's currently there?

Read more than just the headline. He didn't "collect rainwater" - he damed and diverted rivers that supply a metropolitan area with drinking water so he could have ponds, on property he didn't own the water rights to.