Using a mixed-integer programming model, the impacts of institutional constraints on the marginal capacity for energy development in the Yellowstone River Basin and consequent hydrologic changes were examined. Under average annual flow conditions, energy outputs in the Yellowstone Basin can increase roughly nine times by 1985 and 12 to 18 times by 2000. In contrast, water availability is limiting energy development in the Tongue and Powder River Basins in Wyoming. Variability in hydrologic regime causes model solutions to change drastically. If flows decrease to 80 and 60% of average annual levels, the energy production is decreased by 17 and 95%, respectively. If development strategies in the basin are followed on the basis of 80% average annual flows, the Buffalo Bill enlargement (271,300 acre-ft), Tongue River Modification (58,000 acre-ft), and the two reservoirs at Sweetgrass Creek (each 27,000 acre-ft) will be necessary, in addition to several small storage facilities, to best meet the instream flow needs in Montana and to deliver the waters apportioned by compact between Wyoming and Montana. Furthermore, the results indicate that relaxing the instream flow requirements from recommended levels by 10% could increase regional energy output by 19% in 1985 and 35% in 2000. This model illustrates that modifications in institutional restrictions to achieve greater water mobility between users in a given state, as well as flexible practices for transferring water between states, can assist economic growth. Thus, the probability for restricted energy development at this juncture appears to be affected to a greater degree by institutional constraints than by water availability constraints.