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Water and wastewater infrastructure worldwide faces unprecedented demand and supply conflicts that require unconventional solutions. In this study, we develop a novel modelling framework to assess the environmental and economic implications of a hybrid water supply system that supplements a centralized surface water supply with distributed direct potable reuse (DPR) of municipal wastewater, as a strategy to address such challenges. The model is tested with real water and wastewater systems data from the City of Houston, Texas. Results show that supplementing the conventional centralized water supply with distributed DPR would reduce water age in the drinking-water distribution network and hence improve water quality; properly designed system configurations attain system-wide net energy savings even with the high energy consumption of existing technologies used for advanced treatment of the wastewater. A target energy efficiency for future advanced treatment technologies is identified to achieve net energy saving with all hybrid system configurations. Furthermore, distributed DPR remains financially competitive compared with other unconventional water supply solutions. The modelling framework and associated databases developed in this study serve an important research need for quantitatively characterizing distributed and hybrid water systems, laying the necessary foundation for rational design of integrated urban water systems.