"Plain Talk" answer: Water suppliers have fixed costs - salaries, hydrant maintenance, mortgages and so forth. They must collect this money regardless of water use, so when water volume goes down because of conservation by the public, the cost of each gallon of water used sometimes is raised to provide the water supplier with the money it needs to maintain its system. However, water conservation can eventually lead to stable rates for a longer period of time, because capital improvements or new investments can be postponed if demand does not increase.

For more information on this and many other water-related topics, check out "Plain Talk About Drinking Water" by Dr. James M. Symons.