This paper develops bidding strategy for operating pumped storage power plant in a combined pool-bilateral market. 1 / 0 /-1 mixed-integer programming model to account discrete tri-state operation of pumped storage plant is developed and multi-looping sequential optimization approach is used to solve the problem. Considering realistic case study, operating strategies for the pumped storage plant are evaluated. Operating pumped storage plant in an electricity market can lead to significant changes in the consumer and producer surplus, energy prices and market efficiency. This paper investigates how integration of pumped storage energy trade affects the net welfare of electricity market. ©2009 IEEE.