<p>Institutional conflicts of interest constrain regional water management in metropolitan systems supplied by multiple reservoirs and operated by separate utilities. Such conflicts arise when decentralized utilities pursue cost-minimizing strategies that diverge from system-wide reliability and social welfare objectives. This study examines these dynamics in the Taipei metropolitan water supply system, where two reservoirs with contrasting hydrological reliability are physically connected through a cross-basin water transfer infrastructure intended to rebalance regional allocation. A deterministic scenario-based analysis using the Water Evaluation and Planning (WEAP) model is conducted under varying hydrological stress regimes to evaluate alternative allocation priorities and pricing structures. The analysis links hydrological conditions, infrastructure operation, and utility-level financial incentives to system-level social loss. Results indicate that pricing and transfer-payment adjustments can align institutional incentives with socially preferred outcomes when scarcity is localized and overall system reliability is maintained. However, when severe drought affects the historically more reliable subsystem, pricing mechanisms alone become insufficient to prevent socially suboptimal allocation. These findings demonstrate that physical integration without incentive alignment does not guarantee effective coordination and clarify the conditions under which pricing instruments can mitigate institutional conflict in regional water systems.</p>