how do i use buttercream icing on a layered cake (different size layers) to look in color like a waterfall (shades of white and blue).

When I need a water effect I put white frosting down first, then I get clear piping gel and tint it blue and spread that on top. The white still comes through giving you an awesome water effect.

First, I think I would make the "pool" where the waterfall ends with some blue gel icing. Then I would make a couple different colors of blue icing and "stripe" my icing bag with the different colors of blue and white. Striping is when you take your icing bag and you put in more than one color (sorry, if you already knew this). Using the shell border tip (#133) bring the "waterfall" down the side of the cake ending in the gel "pool". Then maybe some random "splashes" too. Then maybe dab on some blue gel icing. I hope this made sense. Practice it on some parchment paper first too see if it gives the effect you are looking for.

If you really want to use BC and you don't have an airbrush, you can use the blue Wilton icing spray to get a water look (more for waves, but may work for waterfall). If you are interested in checking it out, I did it around my cruise ship cake.
But I think the piping gel will give you a better waterfall look. Perhaps you can put it on top of the blue sprayed BC? Please post pics after...

I did one with buttercream and piping gel. I piped blue bc for the water flowing down, then added some white. Then I added clear piping gel over the whole thing. Pic is here: http://cakecentral.com/modules.php?name=gallery&file=displayimage&pid=1867055