Arc furnaces are one of the main causes in power quality degradation in power industrial lines. Their high nonlinearity and time varying characteristics produce high harmonic distortion as well as voltage fluctuations. This paper describes both the modeling and application of a D-STATCOM for power quality analysis and its advantage to mitigate power quality problems introduced by the arc furnace operation. Both the D-STATCOM and the arc furnace are modeled in PSCAD-EMTDC. Using voltage, current and power measurements at the point of common coupling (PCC) of a 30MVA steel mill, both arc furnace non-linear characteristic and stochastic behavior, during the metal melting process, are modeled and adjusted. The D-STATCOM presented uses a nonlinear control strategy-adaptive hysteresis band-to compensate load reactive power variations. The dqO theory is used to refer the three-phase system into a dqO frame to achieve the analysis. The results show the advantage of using the D-STATCOM at PCC to mitigate power quality issues.