Under the new agreement, the commonwealth will pay for a new study conducted by an independent engineering firm which hasn't performed work for any of the cities in the past. The study will examine all aspects of the cities' water system including rates, availability, cost and long-term outlook.
Earlier this month, the city councils of Benham and Lynch approved the measure. They were joined by Cumberland on Monday.
Once completed, the state will make recommendations concerning customer rates. If the city decides to reject the rate proposals, it must offer compelling reasons to the state on why the costs to customers shouldn't change.
If the state rejects the reasons, and the local government doesn't accept the new rates, the city could lose access to grants and loans for some projects.
"We need to do a study anyway," Cumberland Mayor Carl Hatfield said. "This way, the state can pay for it."
The council approved the new interlocal agreement unanimously Monday.
If the recommendations of the state-sponsored study are adopted by the local governments, the state is offering $1.25 million for water-system renovations. Currently, there is no concrete plan on how this money will be spent or divided between the three cities.
At a meeting with the Cumberland Valley Area Development District last week, Hatfield was told that the city's water rate appeared to be in line with production costs.
"(The rates) looked pretty good," Hatfield said. "It could be a little low, but it's in line."
Under the state plan, the rate structure will be re-examined every two years and recommendations concerning rate increases or decreases would be issued.
Hatfield and the council agreed to cooperate with the new study and will consider its recommendations when it is presented to the council.
There is no timetable for when the study could begin or be complete.