Bending depends on the breath, so by flooding herself and Azula, Katara leveled the playing field and had the one up. Azula always could count on her bending, she was taught as a toddler. Katara had to find her own way at first, and using ordinary power wasn't such a letdown or debasement to her.
Otherwise, very clever way of the dealing with the Fire Lord/Phoenix King. Take away his bending, declaw and defang the Tiger. His whole attitude was based on might made right, and now he isn't the mightiest anymore.
Yeah, we could do a season four, where Zuko has to balance budgets, deal with bureacracy and find his mother and deal with cranky Mai (wonder who they are betrothed to), Aang has to find a school or a home to go to, Soka, and Katara and Hokada have to wend their way home, and Toph should go home to her parents.
But not anytime soon