The Council has insisted that South West Water extending its licence to cover Scilly is "great news for the islands".
In its end of year financial results, Pennon Group Plc - which owns South West Water - said that "following customer consultation and support" a license expansion has been agreed by DEFRA with water regulator Ofwat to cover Scilly.
The report continued: “This transfer is at zero cost but will lead to investment of around £40 million by 2030 to bring the infrastructure up to the standards we would expect at South West Water and at the same time delivering RCV growth.
"Surveys indicate a willingness to pay for this investment [from existing customers]. An increase in water quality, public health and security of supply will all be delivered along with targeted improvements of bathing waters to achieve increased standards."
The news has caused concern among islanders that bills will increase, with some saying they have not been consulted on a possible transfer to South West Water.
The Council told This is Scilly that it will be updating residents in full next week, adding: "The announcement made in Pennon Group's financial results is great news for Scilly because it offers a potential means of the islands complying with water legislation."
Meanwhile Cllr Steve Sims, Lead Member for Place, wrote on social media: "Firstly this is REALLY GOOD NEWS, but it's a shame it came out in a trade journal rather than through a more appropriate channel, which took everyone by surprise.
"There has been consultation in this area since 2015. We have options, which have been made clear at numerous meetings - 1) do nothing, in which case the Environment Agency will shut the islands down; 2) pay for it ourselves, which is over £20,000 per man, woman and child (£40m); or 3) pass it on to an outside body. So in terms of consultation the option is do you want to get in the lifeboat or would you rather drown? It's that stark.
"On St Mary's and Bryher, the Council's very small water team do a fantastic job, but sewerage is another matter. Our sewerage processing is not compliant at all and at some point we must stop pumping "organic" foul water straight into the sea. With our current sewerage infrastructure we can't even stand still, let alone develop. This is a fantastic opportunity to drag the islands into the the 21st century.
"You will all be receiving a comprehensive update early next week when the Town Hall reopens."