The Federal EPA told CA "You're exceeding smog levels in some areas (e.g. Sacramento & Riverside County), so you must add oxygenate to your fuel."
CA objected, saying "Let us deal with our smog in our own way, and judge us by our results. We think we can do it without oxygenate." EPA (under W. Bush) said "No, our rules say you must add oxygenate, and we're not granting you any exceptions" basically as a favor to MTBE and Ethanol interests.
The original decades-old studies said adding oxygen to gasoline makes engines burn leaner. That's true, if your engine has a carburetor. Modern cars all have fuel injection with oxygen sensors in the exhaust; when the FI computer detects the lean mixture, it sprays in more gas, "fixing" the lean condition. Bottom line: slightly lower mileage, *no change* to smog, and a transfer of $$ from the consumer to the oxygenate producer.
CA refiners used MTBE because it was cheaper than Ethanol; Ethanol couldn't be shipped via existing petroleum pipelines, because it's hygroscopic (water loving). MTBE is also hygroscopic, but you need less of it to oxygenate gasoline.
So, CA refiners added MTBE, and the oxygenated gas leaked out of gas station tanks into the water table. It turns out that all underground gasoline tanks always leaked gasoline into the water table, but gas and water don't mix! This was never a problem, until MTBE got into it. Lots of aquifers (wells) were ruined this way; search for "Charnock MTBE" for a typical disaster.
The boating thing was because the existing two-cycle marine engines (outboards and personal watercraft) were grossly inefficient; at part throttle, about 1/3 of the gas you put into those engines blows through the engine without burning. And most pleasure watercraft emit their exhaust underwater. All that raw gasoline in the lake wasn't a problem because gas and water don't mix!... Until you add MTBE. Rain had nothing to do with it; the MTBE put in car engines was generally burned properly; car exhaust has only traces of MTBE left.
MTBE has never been proven to cause cancer. It's apparently very similar to several other chemicals that do, and it's widely believed to cause cancer, but nobody has funded the studies. The MTBE producers and gasoline refiners don't want to know. However, we do know that MTBE makes water taste like paint thinner.
CA never wanted to use MTBE or Ethanol. EPA relented on CA oxygenate right after W. left office. CA gasoline has been essentially MTBE-free since.