Abstract: Regulating reservoirs are needed to give full play to the peak-shaving effect of large upstream hydropower stations and to ensure downstream water supply as well as ecological flow. Currently the research on reverse regulation just focuses on the downstream reservoir′s regulation to the upstream reservoir′s outflow or productive head, but without considering them both. In view of the above problem, this paper takes Pankou-Xiaoxuan cascade reservoirs on the Duhe River as an example, in which two operation modes ("electricity to water" and "water to electricity") coexist. Considering Xiaoxuan′s regulation to Pankou′s outflow and Xiaoxuan′s backwater effect on Pankou′s backwater, a model of their short-term optimal operation is developed and solved by the Improved Progressive Optimality Algorithm. The calculation results show that raising Xiaoxuan reservoir's water level and running its generator sets within the high-efficiency zone can enhance power generation benefits of the entire cascade hydropower stations.