The second sentence of this argument smells like a conclusion, but in the end, it's just a statement of fact since there's no support given for it. It serves as context. The last sentence is where we find the argument and gap that needs strengthening.
The conclusion is that the town discourages conservation. Why? Because households pay a monthly flat fee, and only pay a per-liter rate when they've used more than a certain threshold. Basically, why conserve if the amount of water you use doesn't affect how much you pay. Right? But, what about that threshold? Doesn't that come into play and perhaps make people conserve? I guess it depends on how high the threshold is. If it's really low - like 2 liters per day - then folks might conserve. But if it's 4,000 liters per day, then I'd probably agree with this argument. So, the gap is that the argument assumes the threshold doesn't encourage conservation.
(C) addresses that gap - validating the assumption that the threshold is high enough.
As for the wrong answers:
(A) is about the water emergency - the argument is about whether the town discourages conservation based on the water fee structure.
(B) is tempting, since it's about the threshold. But if the threshold were already high enough, who cares if they raised it recently?
(D) is similar to (B) in that it's about the threshold, but we don't know how high the neighbors' thresholds are, so this doesn't tell us much about Springhill's.
(E) is about how the law would change - who cares?