The potential and limitations of conjunctive use of surface and groundwater are explored for southern California's water supply system. An economic-engineering network flow optimization model, CALVIN, is used to analyze the economic and reliability benefits from different conjunctive use alternatives. Flexible management of additional conjunctive use facilities and groundwater storage capacity under flexible water allocation can generate substantial economic benefits to the region. Conjunctive use adds operational flexibility to take better advantage of water market transfers, and transfers provide the allocation flexibility to take better advantage of conjunctive use. The value of conjunctive use programs along the Colorado River Aqueduct, in Coachella Valley, and north of the Tehachapi Mountains under economically optimized operation of the system is examined. Results reveal reductions of economic demand for increased imports into southern California, suggest changes in the system operations, and indicate significant economic benefits from expanding some conveyance and storage facilities.