The prerequisite for stable system frequency is to have instantaneous balance of demand and generation of active power. In the framework of the well-known mechanism design theory, the problem of designing an optimal contract between a utility company and a pumped-storage power plant is investigated for frequency regulation that could act as an effective tool for system frequency control in deregulated power systems. Optimization models with different risk types are developed and simulations based on a sample example are employed for demonstration. The results show that the contract such developed benefits both the utility company and the pumped-storage power plant. (8 pages)