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This paper proposes a new algorithm to generate reference voltage for a distribution static compensator (DSTATCOM) operating in voltage-control mode. The proposed scheme exhibits several advantages compared to traditional voltage-controlled DSTATCOM where the reference voltage is arbitrarily taken as 1.0 p.u. The proposed scheme ensures that unity power factor (UPF) is achieved at the load terminal during nominal operation, which is not possible in the traditional method. Also, the compensator injects lower currents and, therefore, reduces losses in the feeder and voltage-source inverter. Further, a saving in the rating of DSTATCOM is achieved which increases its capacity to mitigate voltage sag. Nearly UPF is maintained, while regulating voltage at the load terminal, during load change. The state-space model of DSTATCOM is incorporated with the deadbeat predictive controller for fast load voltage regulation during voltage disturbances. With these features, this scheme allows DSTATCOM to tackle power-quality issues by providing power factor correction, harmonic elimination, load balancing, and voltage regulation based on the load requirement. Simulation and experimental results are presented to demonstrate the efficacy of the proposed algorithm. [ABSTRACT FROM AUTHOR]