In electrical distribution systems, capacitors are used for reactive power compensation and reducing active power losses. With the presence of harmonic distortion the installation of shunt capacitors will amplify the harmonics distortion level. The objective of this study is to investigate the effect of capacitor placement on a certain feeder in AL_AMILdistribution network in Baghdad city with the presence of harmonics generated by a large non-linear load such as an ARC furnace. The CYMDIST software package was used for the implementation of this study. The results show the effectiveness of optimal capacitor placement on reactive power compensation, enhancing voltage profile, relieving the lines from over load conditions, and reducing active power losses. However the total harmonic distortion level is increased and methods are required for mitigation the harmonic effects. Several passive filters have been considered to tune out the harmonics; among these the double tuned filter has proven to be the most effective one for our particular case.