In this paper, a multi-stage fuzzy proportional integral derivative (PID) type controller is proposed to solve the automatic generation control (AGC) problem in a deregulated power system that operates under deregulation based on the bilateral policy scheme. In each control area, the effects of the possible contracts are treated as a set of new input signals in a modified traditional dynamical model. The multi-stage controller uses the fuzzy switch to blend a proportional derivative (PD) fuzzy logic controller with an integral fuzzy logic input. The proposed controller operates on fuzzy values passing the consequence of a prior stage on to the next stage as fact. The salient advantage of this strategy is its high insensitivity to large load changes and disturbances in the presence of plant parameter variations and system nonlinearities. This newly developed strategy leads to a flexible controller with simple structure that is easy to implement, and therefore, it can be useful for the real world power systems. The proposed method is tested on a three area power system with different contracted scenarios under various operating conditions. The results of the proposed controller are compared with those of the classical fuzzy PID type controller and classical PID controller through some performance indices to illustrate its robust performance. (c) 2006 Elsevier Ltd. All rights reserved.