A two-level hierarchical approach for optimum allocation of reactive volt ampere (VAR) sources in large scale power system planning is presented in this paper. The approach takes advantage of the natural distinction between var dispatch in system operation (Level 1) and var allocation in system planning (Level 2). The two levels are related together using the Generalized Benders Decomposition. The methodology has been implemented in the form of a prototype computer program which can be applied to large scale power systems with up to 1500 buses. The results of testing the package with practical power systems of different sizes and characteristics indicate that the technique is a valuable tool for reactive source allocation.