This paper presents a new algorithm for solving the optimal contract capacities of a time-of-use (TOU) rates industrial customer. This algorithm is named iteration particle swarm optimization (IPSO). A new index, called iteration best is incorporated into particle swarm optimization (PSO) to improve solution quality and computation efficiency. Expanding line construction cost and contract recovery cost are considered, as well as demand contract capacity cost and penalty bill, in the selection of the optimal contract capacities. The resulting optimal contract capacity effectively reaches the minimum electricity charge of TOU rates users. A significant reduction in electricity costs is observed. The effects of expanding line construction cost and contract recovery cost on the selection of optimal contract capacities can also be estimated. The feasibility of the new algorithm is demonstrated by a numerical example, and the IPSO solution quality and computation efficiency are compared to those of other algorithms. (c) 2006 Elsevier Ltd. All rights reserved.