Waldo lake is one of the most impressive sights in Oregon. I've yet to fish the waters, but I know from experience that Chuck's photos are only the tip of the iceberg (those pics make me want to go back ASAP!). The lake is simply incredible.
I wasn't aware of the diversion project, but Wikipedia had this to say:
Starting in 1905 plans were begun to use the lake as a reservoir for irrigation in the Willamette Valley. To this end the Waldo Lake Irrigation and Power Company was created in 1908 by several people including F.H. Ray. In 1909 a permit was issued by the Forest Service to build a tunnel from the lake to a nearby creek. Construction of the tunnel began that year and finished in 1914 under the direction of engineer Simon Klovdahl. The 500-foot (150 m) tunnel was able to lower the lake level by 25 feet (7.6 m). However, the company was never able to prosper and the head gates on the SW shore were sealed in 1960.
I'm guessing they're talking about the dam-like structure in one of the photos.
As to the ban on motors, we'll see what happens. The dispute now is centered on whether Oregon or the Feds "own" the lake. If Oregon owns it, then the USFS can't put regulations on it. But Teddy Kulongoski has suggested that, should the lake come into state ownership, he'd implement a ban identical to what the USFS is trying to do.
At last estimate, only 5% of the boaters that ventured onto Waldo used an internal combustion engine. For the most part it's canoes, kayaks, and sail boats. The USFS indicated that the reason for the ban was to preserve the "aesthetics" of the campgrounds. Now, I'm all for preserving the beauty of the lake, but I couldn't justify an all-out ban on motors so easily. Unless there was a serious threat to the health of the lake, I would allow the 5% to continue to use their motors.