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This paper presents a new algorithm for the optimal long-range generation planning for hydro-thermal system. The algorithm is based upon the analytical production costing model developed under the assumption of Gaussian probabilistic distribution of random load fluctuations and plant outages. The optimization problem consists of the master problem to determine the annual investment, and the hydro subproblem to determine the optimal hydro operation. The master problem is formulated as a Hamiltonian minimization problem, and the hydro subproblem is solved using the concept of peak-shaving operation on the original load curve.