I've never seen diesel fuel turn milky with water - although trans/hydraulic fluid commonly turns milky when it gets more water in it than it can handle. Usually from rainwater running down the shift levers and into the trans/hydraulic sump.
Usually what i see in diesel is a separation of the water and fuel. Diesel is kind of a transparent fluid with a faint yellowish cast, and floats on top of the water which is kinda murky sometimes. But I haven't seen them mix.
Whatever it is that he has going on, I'd get rid of it, put in new diesel, and add some diesel biocide. Power Service makes diesel treatment chemicals and sells through Ace, Walmart, & most any auto store.