The Commission says its draft determination is dependent on the Treasurer valuing SA Water's assets in line with its expectations.
ESCOSA says the proposed reduction in water and sewerage prices has been based on its evaluation of what it believes SA Water will need to spend over the next three years for operating and capital expenses.
Commission CEO Paul Kerin said water bills should fall.
"The average revenue caps contained in the determination would reduce average real water prices (before inflation) by 5.4 per cent," he said in a statement.
"The overall average real reduction in water and sewerage prices combined would be about 3.3 per cent after allowing for a 1.7 per cent increase in average real sewerage prices."
Dr Kerin said it was up to SA Water to work out how it would change its pricing structure to meet the new revenue cap.
"They'll have to offer a reduction to consumers in total. How they do that in terms of usage charges and supply charges or how they do that by customer segment that's up to SA Water," he said.
The Commission's final determination will be handed down in May.
Dr Kerin said, after the July adjustment, he did not expect to change average real water and sewerage prices for the next three years.
Under legislative changes, it is the first time caps have been set for water and sewerage in SA by an independent regulator.
In response to the draft determination, SA Water said it would now review the document and make its response as part of the public consultation process.
South Australians have faced hefty water price rises in recent years, in part to meet the costs of building a desalination plant for Adelaide.
Premier Jay Weatherill welcomed the draft ruling.
"There is a lot of work to do but this opens up a path to a possible reduction in water prices for consumers," he said.
"We made a commitment that after the big price increases that we'd seen recently that we wanted to limit future price increases to CPI.
"This draft ruling gives us the opportunity to do even better than that.
"There's a final ruling that needs to be put in place, then the Government needs to respond and set prices based on it."
Opposition Leader Steven Marshall said consumers needed relief but should not have been paying so much for water in the first place.
The South Australian Council of Social Service (SACOSS) said there would be little financial benefit for many households.
Water users received a one-off rebate of either $45 or $75 on their most recent bill, but that will not continue.
SACOSS official Ross Womersley says the rebate should be extended, at least for low- and fixed-income earners.
"The result of the rebate meant some people, well the whole community, didn't in fact face the real price increases from last year and they will continue to have to meet that cost and that cost will kick in from July 1, so in practice it won't be a huge bonus to water consumers," he said.