This paper presents the model of a STATCOM which is controlled externally by a newly designed Power Oscillation Controller(POC) for the improvements of power system stability and damping effect of an on line power system. The proposed POC consists oftwo controllers(PID & POD).PIDparameters has been optimized by ZiglerNecles close loop tuning method. Machine excitation has been controller by using excitation controlleras required. Both single phase and three phase faults has been considered in the research. In this paper, A power system network is considered which is simulated in the phasor simulation method& the network is simulated in three steps; without STATCOM, With STATCOM but no externally controlled, STATCOM with Power Oscillation Controller(POC). Simulation result shows that without STATCOM, the system parameters becomes unstable during faults. When STATCOM is imposed in the network, then system parameters becomes stable. Again, when STATCOM is controlled externally by POC controllers, then system voltage & power becomes stable in faster way then without controller. It has been observed that the STATCOM ratings are only 20 MVA with controllers and 200 MVA without controllers.So, STATCOM with POC controllersare more effective to enhance the voltage stability and increases power transmission capacity of a power system .So STATCOM with POC& excitation controllers, the system performance is greatly enhanced.