In an electrical power system, the generated power is transferred through a high voltage transmission system, and it reaches the low voltage consumers at the distribution side. In a distribution system, real power loss is very high compared with the transmission system due to low voltage, high current and high R/X ratio. It is a known fact that the economic enticement of distribution companies are to minimize losses in their networks. In general, this enticement is the difference in cost obtained between real and standard losses. Thus, when real losses are more than the standard losses, the distribution companies are penalized economically, or when the opposite occurs, they earn a profit. Hence, power loss problem in distribution system is a serious issue and needs to be researched. Power loss in the Wonji Sugar Factory becomes a serious problem due to overload, inappropriate capacitor location & size. This high power loss in the Factory leads to low power factor, which results system instability and financial penalty. Therefore, in this study investigation and design of capacitor compensation for loss minimization is carried out, by using capacitor compensation techniques. The installation of capacitor compensator in the existing Factory was implemented; however, the inappropriate values and the improper locations of this capacitor worsen the problem. This thesis makes a detail work on power system issues such as investigating existing distribution system behavior, capacitor compensation reduction techniques, reactive power flow and its compensation, power factor and voltage quality indicators such as voltage regulation. The effectiveness of the proposed method has been demonstrated on both the existing and modifying distribution network. To achieve these objectives, the distribution system of the Factory has been modeled by using DIgSILENT power factory software and simulation of the existing and modified Factory distribution network the capacitor compensation is carried out. The simulation result confirms that active power loss is reduced from 0.24 to 0.16 MW, voltage is increased from 0.8681 to 0.9509 p.u values at bus name (PTCBB) and over all power factors has improved from 0.80 to 0.90 and by this 665181.139 birr is saved from waste annually because of power loss.