An operational model that analyzes the relationship between annual energy output and year-end stored energy of a reservoir system was developed and used for determining the optimal year-end water level of a multi-year regulating storage reservoir. The model accounts for the capacity benefit of a multi-annual storage plant and was validated using the case of the Longyangxia reservoir in the upper reaches of the Yellow River, China. The critical elements for determining the optimal year-end water level for multi-year regulating storage reservoirs were revealed through analysis of the impacts of runoff and year-start water level on year-end water level. Simulated operational results from the model were compared with practical operational results for the Longyangxia reservoir system from 1990–2012. A comparison shows that the operating mode for Longyangxia reservoir (after 2006) achieved significant improvement versus before 2006, in making the reservoir run at a higher water level and increasing benefits. In addition, our study indicates that the model can be effectively used for multi-year regulating storage reservoir operation.