When the Holy Temple stood in Jerusalem, one of the special Sukkot observances was to pour water on the Altar. The drawing of water for this purpose was preceded by all-night celebrations in the Temple courtyard; on the 15 steps leading to the azarah (inner courtyard) stood Levites while playing a variety of musical instruments, sages danced and juggled burning torches, and huge oil-burning lamps illuminated the entire city. The singing and dancing went on until daybreak, when a procession would make its way to the Shiloach Spring which flowed in a valley below the Temple to "draw water with joy." "One who did not see the joy of the water-drawing celebrations," declared the sages of the Talmud, "has not seen joy in his life."
While water was poured each day of the fetival, the special celebrations were held only on Chol Hamoed since many of the elements of the celebration (e.g., the playing of musical instruments) are forbidden on Yom Tov.
Today, we commemorate these joyous celebrations by holding Simchat Beit HaShoeivah ("joy of the water drawing") events in the streets, with music and dancing. The Lubavitcher Rebbe initiated the custom of holding such celebrations on Shabbat and Yom Tov as well -- without musical instruments of course. The fact that we cannot celebrate as we did in the Temple, said the Rebbe, means that we are free to celebrate the joy of Sukkot with singing and dancing every day of the festival.
Link: The Taste of Water