It is a little complicated. Water rights in the eastern half of the country are normally divvied up based on what is known as riparian rights. Riparian rights means that the owner has the right to a reasonable amount of water that flows next to or through their land.
In a land grant from the British Crown, the King gave Virginia the rights to the James River. It has become an intrical part of the history and the success of Lynchburg. 
The General Assembly created the James River Company and later the James River and Kanawha Company to build a canal in 1784. Work on a dam across the river started in 1830 to provide water for residents. In 1832 the James River & Kanawha Company was granted the rights to build dams and canals to divert the river's flow for navigation and other purposes. After the company purchased the city's dam and Kanawha Canal it built the Water Works Canal in 1885 to add to the water available. This agreement allowed the city to withdraw 600,000 gallons per day from the Water Works Canal.
In 1879, the James River & Kanawha Company sold its water rights to a railroad company which took on all its debt related to the dam & canal. Then in 1881 the city released $50,000 in debt in exchange for the right of a fifth of the water in the river in an agreement that the railroad would also build the Scotts Mill Dam.
In 1940 Appalachian Power Company purchased the Scotts Mill Dam and the Water Workds Canal along with the water rights that the railroad had which was four fifths of the water in the James.
The city no longer withdraws water from the canal and in 1997 Griffin Pipe made an agreement with the city to fill a portion of the canal in the event that the city needed to withdrawl water from the canal.
In 1990 Luminaire purchased the dam and APCo's four fifths water rights. The city may have difficulty taking advantage of its water rights should they ever chose to. However, clearly Lynchburg has riparian rights to the James.
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