I'm confused.
There is a green wire clamped to the pipe, so it seems that the pipe is being treated as a grounding electrode.
But the pipe as installed has insulating gaskets and would not qualify as a grounding electrode?
The water authority doesn't want the pipe used as a grounding electrode?
IMHO if the pipe qualifies as a grounding electrode, then it must be used as such.
If the water authority objects to using their main as a grounding electrode, than they should have a requirement to ensure that the pipe doesn't qualify as a grounding electrode.
If, as installed, the pipe doesn't qualify as a grounding electrode, then remove the GEC and make everyone happy. (Of course you will still need your interior water pipe bonding.
If, as installed, the pipe does qualify as a grounding electrode, then let the authorities hash out their conflicting priorities.
Jon