This paper presents a method for treating transmission network bottlenecks in a stochastic market model, through a flow-based market clearing process. The market model is designed for long-term and medium-term scheduling of hydrothermal power system operation, where generators and loads are allocated into regional subsystems or price areas. In addition to detailed hydropower, the model allows the use of detailed wind power data and start-up costs on thermal generators. A description of the model's overall simulation logic is presented, emphasizing on the introduction of network constraints in the system simulation part. Simulation results at price-area level are disaggregated to a transmission network model. Potential overloads are identified through linearized (DC) power flow analyses. In case of overloads, network constraints are generated by use of aggregate sensitivity factors and added to the market model. A four-area test case is presented to illustrate the impact of including detailed network analyses on the simulation results. © 2012 John Wiley & Sons, Ltd.