Households will have extra incentive to take shorter showers and cut water use in other ways when a new pricing structure starts on July 1.
Fixed service charges will be reduced while the water use price will rise.
At the same time, higher water use charges will apply when dam levels fall below 60 per cent.
The Independent Pricing and Regulatory Tribunal (IPART) said the changes meant "if customers reduce their water use, they reduce their bill".
"A typical household using 200kL of water per year would see a decrease in their bill of around seven per cent during normal weather periods, and an increase of seven per cent during drought," the tribunal said
"Reducing water consumption by 13 per cent would offset this increase, and keep bills unchanged from current levels."
The new system has been welcomed by the Lees family of Woronora Heights, who are already very conscious of saving water.
At times, after a long walk with their cavoodle and poodle, they will take the dogs with them into the shower.
The family has also turned an old wheelie bin into a mobile water tank with spray attachment to wash the car.
Julie Lees and daughter Amity, 15, are "passionate" about their local environment.
"We want to see Sutherland Shire continue as it is now and not take it for granted," Julie said.
"When it comes to water saving, we believe every little bit counts, whether it's cutting down the time in the shower, fixing a leaking tap or saving the cold water from the kitchen tap while you are waiting for the hot.
"If we all do the little things, we can save a lot of water."
Under the new Sydney Water pricing system, if dam levels are above 60 per cent, water will cost consumers $2.35 a kilolitre, but if they fall below that level, the prices will increase to $3.18.
The present price is $2.11 a kilolitre.
With dam levels currently above 80 per cent, the average Sydney water bill is forecast to drop by $80 or seven per cent next month.
The pricing tribunal rejected submissions for an Inclining Block Tariff IBT), where customers pay a usage price for a set amount of water, and then a higher water usage price if they consume above this threshold.
"The most important driver of a household's water consumption is the number of people in the household," the tribunal said.
"An IBT would provide less incentive for smaller households to conserve water and penalise large households.
"It could not be applied simply or fairly for customers in older apartments, or business customers which includes the largest water users."
Research carried out this year for Sydney Water found people are spending an average of nine minutes in the shower a day - more than double the recommended water wise limit of four minutes.
The research found more than 50 per cent of those surveyed viewed the shower as a sanctuary, providing "me time".
Forty-two per cent of respondents said they listened to music in the shower, while 14 per cent watched TV or podcasts (10 per cent) and FaceTimed friends and family (12 per cent).
