A systematic procedure is developed to locate reactive power devices in a power system based on a set of indices, that are based on overall system conditions. After identifying the desired locations, the cost of installation and number of reactive power devices, subject to any required practical and real economic constraints, are minimized. Existing controllers are fully utilized before adding any new devices. Linearized sensitivity relationships of power systems are used to obtain an objective function for minimizing the cost of installation. The constraints include the limits on dependent variables (reactive powers of the generators, load bus voltages) and control variables (generator voltages, tap positions, switchable reactive power sources). A parametric linear programming technique based on active set analysis is proposed to solve the reactive power allocation problem.