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This paper presents the analysis of automatic generation control (AGC) of an interconnected hydrothermal power system in the presence of generation rate constraints (GRCs). The improvement of AGC with the addition of a small capacity superconducting magnetic energy storage (SMES) unit in either, as well as in both the areas are studied. Time domain simulations are used to study the performance of the power system and control logic. The optimal values of the integral gain settings are obtained using integral squared error (ISE) technique by minimising a quadratic performance index. Suitable method for controlling the SMES unit is described. Analysis reveals that SMES unit fitted in either of the areas is as effective as SMES units fitted in both the areas and improves the dynamic performances to a considerable extent following a load disturbance in either of the areas.