We see this over and over again.
Generally speaking, water is free to municipal/industrial customers in the United States. What we pay in our water bill is for the cost of delivery – the pumps and pipes. We’re paying for water delivery infrastructure, not the commodity itself.
But we nevertheless generally price the water by unit consumed, with utilities setting their rates to cover those infrastructure costs (plus profit if it’s a private utility).
We conserve. Revenue (remember it’s priced by unit sold) goes down. But most of the cost for the pipes and pumps is fixed, and doesn’t vary when users consume less. So conservation-minded customers are rewarded by rate increases. From the Orange County Register:
The Golden State Water Co. has applied to the California Public Utilities Commission to raise its 2013 water rates that could see Golden State’s average residential customer’s bill in Orange County increase by 24 percent. The boost, the company says, is to offset lower profits caused by a drop in water consumption and for system upkeep.