Reservoir operation studies purely based on the storage level, inflow, and release decisions during dry periods only fail to serve the optimal reservoir operation policy design because of the fact that the release decision during this period is highly dependent on wet season water conservation and flood risk management operations. Imperatively, the operation logic in the two seasons are quite different. If the two operations are not sufficiently coordinated, they may produce poor responses to the system dynamics. There are high levels of uncertainties on the model parameters, values and how they are logically operated by human or automated systems. Soft computing methods represent the system as an artificial neural network (ANN) in which the input- output relations take the form of fuzzy numbers, fuzzy arithmetic and fuzzy logic (FL). Neuro-Fuzzy System (NFS) soft computing combine the approaches of FL and ANN for single purpose reservoir operation. Thus, this study proposes a Bi-Level Neuro-Fuzzy System (BL-NFS) soft computing methodology for short and long term operation policies for a newly inaugurated irrigation project in Gidabo Watershed of Main Ethiopian Rift Valley Basin. Keywords: Bankruptcy rule, BL-NFS, Reservoir operation, Sensitivity analysis, Soft computing, Water conservation.