What is the ruling on a grandfather stealing water, and how can this matter be handled for the sake of an accepted fast?

If the water source is owned by an entity that has allocated a specific amount for each person, then your grandfather is not permitted to hoard the excess water. If he does not desist after being advised, there is no sin upon you for trying to prevent him from this injustice, and this will not affect the validity of your fast.

However, if the water is not owned by anyone, then your grandfather is permitted to take what he needs to fill the tanks, and priority is given to those upstream, in descending order.