In conjunction with Elephant Butte Dam, which lies about 25 miles (40 km) upstream, it regulates the discharge of the river in the lower Rio Grande Valley of New Mexico.

Caballo serves as an afterbay for the Elephant Butte Reservoir, i.e. it stores water released from Elephant Butte for hydroelectricity generation purposes and discharges it in the dry season to provide for irrigation agriculture downstream.

The dam is an important part of the Rio Grande Project.

[1][2] A secondary purpose of the dam was to compensate for lost capacity in Elephant Butte Lake due to sedimentation.

[4] Caballo Lake is roughly 7 miles (11 km) long and stores up to 343,990 acre-feet (424,310,000 m3) of water.