The water level contributions from the mass capacity, reverse dynamics, and mechanical oscillations are estimated by applying an adaptive observer. In an adaptive observer, both parameters and state variables of the system are estimated simultaneously. The cost function used in control design compensates the reverse dynamics so that the controller may be insensitive to the reverse dynamics. The time-varying problem is resolved by estimating the parameters at every time step. By estimating the flow errors along with the states and the parameters, a control algorithm is derived to treat the time-varying property, reverse dynamics, and flow measurement errors. The proposed algorithm is compared with the conventional P-I controller. It is found that the adaptive observer-based controller generates faster responses and smaller swell, shrink, and overshoot than the P-I controller does.