Access to reliable and sustainable water is one of the major problems facing households in Addis Ababa city. Improving the water supply of the city requires a huge capital investment while the current water tariff system operates below cost recovery levels. Developing a better water tariff is critical for the improvement and sustainability of water supply services but much depends upon household Willingness to Pay (WTP), This research has aimed to estimate the interest and ability to pay for a reliable and sustainable water supply in Addis Ababa. It has also tried to examine the challenges to providing a sustainable water supply. To achieve these objectives, a household survey was made using the Contingent Valuation Method (CVM) through Double Bounded Dichotomous Choice format. Key informant interviews with higher officials and selected experts was undertaken with supplementary secondary data collected from the water utility and other relevant institutions. The results were analyzed through descriptive and econometric analysis using an interval regression model. The results showed that the current water supply met only 58% of the city’s demand and a majority of households (82%) were dissatisfied with the service. 99% of sampled households indicated they were willing to pay a positive amount for proposed water improvement programs. The calibrated mean willingness of the sampled households to pay was 56.7 cents/jirican, if they could be provided with a reliable and sustainable water supply. In regard to the determinants of household willingness to pay, ten variables, satisfaction, reliability, quality, household perception about the current water tariff, attitude towards responsibility of improving water services, age, family size, income, wealth and education level, were found statistically significant and possible policy variables. The mean willingness to pay is much higher than the current tariff and cost of providing the service. The government is, therefore, recommended to launch different water improvement projects to improve the water supply and at the same time design and implement a new water tariff based on the principle of full cost recovery.