A typical Hunter household's annual water bill will fall by $48 from next month, but not if dam levels stay low.
The Independent Pricing and Regulatory Tribunal announced on Tuesday that a typical water bill will fall by 3.6 per cent in 2020-21 under its four-yearly review of Hunter Water pricing.
But IPART accepted a Hunter Water proposal to introduce higher prices when water storage levels drop below 60 per cent and until they return to 70 per cent.
"We are giving customers more control over their bills," IPART chair Dr Paul Paterson said.
Customers will pay $2.46 per kilolitre of water in 2020-21 except when storage levels fall below 60 per cent, when the price rises to $2.90.
"This allows Hunter Water to recover the efficient costs it incurs to ensure the supply of water in times of low water storage levels, and takes into account the impact of restrictions on the volume of water sold," the tribunal said in its report on Hunter Water prices.
"It also signals to customers through the higher price that it is a time when water conservation is particularly important, and rewards customers that reduce their water consumption."
The Hunter water storage level was 68.7 per cent on Tuesday.
A typical household using 189 kilolitres a year would pay $83 a year more in usage charges during times of low dam storage if it did not reduce its water consumption.
IPART increased water usage charges but cut the fixed charge for water services from more than $100 a year to about $24 for a typical household.
"The substantial reduction in the fixed water service charge means people with low water use will have smaller bills than before," Dr Paterson said.
IPART will allow Hunter Water to increase incrementally the waste-water charge for apartments until they match those for houses.
This means bills for apartments will fall next financial year but will increase to 1.3 per cent above their current level by 2024 as the waste-water charge rises from $535 to $642.
Labor's Shadow Water Minister and Cessnock MP Clayton Barr opposed the new price structure, saying that during times of drought it amounted to a "tax on every household".
"The government is reaching into the pockets of the people of NSW to get more money for the water, despite the fact that for many families there is very little they can do to change their water usage," he said.
"The hardest hit in this proposal will be families with three or more people in the same household and renters."
Dr Paterson said IPART's prices would allow for $653 million in capital expenditure by Hunter Water over the next four years, a $255 million increase compared with the past four years.
The increase would allow Hunter Water to maintain its infrastructure and service standards and plan future drought-resilience projects.
"With many customers facing economic challenges, we are conscious of the need to ensure water bills are affordable while providing Hunter Water with the revenue it needs to maintain a safe and secure water supply," Dr Paterson said.
"Our pricing decisions provide incentives for all customers to conserve water all of the time, while ensuring that customers only pay for the additional costs of drought when necessary."
IPART also agreed to phase out the discount given to large, non-residential users of water.
"We have decided to delay transitioning the removal of this discount by a year, to provide large users with time to investigate alternative water supply solutions, such as onsite recycling," it said.
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