It has caused controversy because it is compulsory, effectively forcing those councils to part with their water pipes and reservoirs.
Last week, Cabinet papers showed a strategy to pursue a "legislated all-in" approach was agreed to in June - about two weeks before the Government's four-entities model was even announced.
Luxon said this was "disappointing" as it put councils through eight weeks of discussions when the decision was already made.
"They'd already predetermined and made up their mind and that's not good faith consultation in any stretch of the imagination.
"I think they're in real trouble on it and I think they really have to listen to the councils."
A mayors' coalition visited Parliament yesterday to voice their Three Waters concerns and meet with MPs.
Luxon was present and said he heard a lot of interesting ideas and thought councils had some innovative solutions.
"They are really smart, really fired up and I think they want to push back on this and they'll do it incredibly intelligently and really well."
The reforms had been delayed until next year which Luxon said was "a good thing" as it gave councils more time to put their proposals forward.
Meanwhile, large sheep and beef farms are being sold to forestry on the East Coast of the North Island.
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There is concern among the local communities that the sales are going to carbon farming rather than forestry.
Luxon said he found the situation worrying and had started to look into the matter with National Party MP for Rangitīkei Ian McKelvie.
"I think it's a real challenge and no one thought through the unintended consequences of all this stuff very well.
"It's very concerning and that is definitely something that Ian and I started to talk about and say, right, what can we do about that."
There were a "whole series of questions and conversations" on the subject, including the ease in which overseas buyers could purchase land and how attractive margins were enticing people to sell up, Luxon said.
"I think the incentives are actually leading to quite perverse outcomes and that's a problem."
Finally, Mackay asked Luxon if there was one member of the Government he would like to have on his team.
Luxon said he was a fan of Mana MP Barbara Edmonds, especially for her work on the finance and expenditure committee.
"She's very, very smart, she's very, very considered and I really admire her work."
Mackay wasn't satisfied with this answer and pressed for a member from the front bench.
Luxon said he would choose Covid-19 Response Minister Chris Hipkins, for taking on "a hell of a job and absorbing a tremendous amount of pressure."
"I think he's very diligent and conscientious, we disagree with some of the things they've done around Covid, but he's probably the one that I would pick from that front bench lineup."
