A two-level hierarchical approach for optimum allocation of reactive volt-ampere (VAR) sources in large-scale power system planning was developed and implemented in this project. The approach takes advantage of the natural distinction between the VAR dispatch in system operation (Level 1) and the VAR allocation in system planning (Level 2). Level 1 is an optimal power flow problem formulated as a nonlinear programming problem and solved using a projected augmented Lagrangian technique. The optimal power flow at this level can handle contingency constraints either in a corrective mode (one contingency at a time) or in a preventive mode (any one of many contingencies at a time). Level 2 is an optimal reactive source expansion problem formulated as a mixed integer-linear programming problem and solved using a branch-and-bound-type technique. The two levels are related together using the generalized Benders decomposition. The approach was implemented in the form of a prototype computer program that can efficiently optimize the location and sizes of new reactive sources in large-scale power systems (with up to 1500 buses). The results of testing the package with practical power systems of different sizes and characteristics confirm that the technique is a very valuable tool for reactive source allocation.more » The results of this project are contained in two volumes. Volume 1 includes solution techniques, computing methods, and results; and Volume 2 is the computer program user's manual.« less