Environmental group "Landwatch of Central Oregon" again sued trying to stop the project saying it would hurt the wetlands and fish and decrease the water in the Tumalo Creek.
Last year this same judge imposed an injunction to stop the project while she investigated whether it would harm the environment.
The city and Forest Service then resubmitted a new plan to meet some of Landwatch's concerns.
The two sides have been meeting in recent weeks trying to reach an agreement on going forward.
Judge Aiken instructed the two sides to continue meeting to try and work out their differences.
But her decision means that the city's water project can move forward -- especially the pipe installment that the city is trying to coordinate with the work being done on Skyliners road -- so the road won't have to be torn up twice.