In this paper a hybrid configuration of a FACTS controller called Optimal Unified Power Flow Controller (OUPFC) which is composed of a mechanical phase shifting transformer augmented with a small scale Unified Power Flow Controller (UPFC) is introduced. The steady-state model of OUPFC is developed as a power injection model. This model is used to develop an Optimal Power Flow (OPF) algorithm including OUPFC to find the optimum number, location, and settings of OUPFCs to minimize the total fuel cost and power losses. Simulation results are presented for the IEEE 14-, 30-, and 118-bus systems. The optimization method is numerically solved using Matlab and General Algebraic Modelling System (GAMS) software environments. The results demonstrate the effectiveness of the proposed approach to solve the optimal location and settings of OUPFCs incorporated in OPF problem and improve the power system operation. Furthermore, the ability of OUPFC to optimize the objective functions is compared to that of PST and UPFC. (C) 2010 Elsevier Ltd. All rights reserved.