"Are they proposing to use the water as fuel? "

Yes. At current launch cost it costs a huge amount of money to lift anything from the Earth to the Moon. It's around $10,000 per lb at about lowest possible current prices. In order to leave the Moon it requires that one bring the rocket fuel to the Moon in order to return.
Since it will cost you at least 10,000 per lb to bring rocket fuel to the Moon that means if one could buy rocket fuel on the Moon it would be worth about 10,000 per lb.
If there is enough water on the Moon and fairly easy to mine, and there was enough of a demand for it, a company could probably sell rocket fuel at the lunar surface for around $2000 per lb. And over time lower costs so that one sell it for less money per lb [at higher volume per year and increasing profit]. Water and electrical power can be transformed into chemical energy- H2 and O2. Then Hydrogen and oxygen can be cooled to create liquid Hydrogen and Liquid Oxygen [LH&LOX]. LH&LOX is probably the best chemical rocket fuel to use in the Space environment- it is the preferred rocket fuel used in the upper stage of rockets. There are disadvantages of using LH&LOX- it's not a high density fuel and requires crygenic storage, but it is one of the highest energies per mass rocket fuels.

With the Apollo program the Saturn V had kerosene & LOX lower rocket stages with LH&LOX upper rocket stages:
http://www.astronautix.com/lvs/saturnv.htm
But the lunar module do not use LH&LOX, instead they used a fuel which was easier to store and simplier and therefore more reliablity:
http://www.astronautix.com/craft/apollolm.htm
The LEM was a fairly massive spacecraft: Mass: 14,696 kg, about 2/3rd of it mass is due to the need of bring it's return fuel- and relative to LH&LOX somewhat inefficent fuel. If you had rocket fuel at the lunar surface ready to use, you could easily reduce a lander by 2/3rd it's mass.