Yep, that's exactly it! Overwatering really seems to reduce the amount of heat each pepper contains. It's known in Chilli growing circles to only water your plants right on the "edge" of when they next need it, basically letting them 90% dry out before you re-water, this is to retain maximum heat in the pods, and to stop the plants from becoming oxygen starved.

I love chilli, and have ever since I was a kid. I don't particularly enjoy novelty heat levels though, it's got to complement the food your eating in a balanced way. I find the Ghost/Bhut Jolokia to basically be on the good side of that threshold, anything over a Ghost I find is simply too overpowering.

*Edit: My mouth is now watering!!*