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This paper presents an investigation of power quality problems arising from electric arc furnace (EAF) operation, and the required compensating system capabilities. It also proposes a compensation system using a shunt active filter and a series inductor. A shunt active filter compensates for the reactive power and the current harmonics of the highly varying load. Reference signals for the compensation logic are obtained from the instantaneous current vector components on a rotating reference frame. Due to noninteger harmonics on voltages at the point of common coupling, conventional methods for the inverter DC bus voltage regulation fail to perform properly. Hence, a new method is introduced for the active filter DC voltage regulation under flickery and unbalanced conditions. A series inductor is also employed to limit the variations of the load current. A real system is simulated using a three-phase EAF model to validate the performance of the compensation system.