A novel power quality conditioning system based on the YN_ balance transformer to improve the power quality, such as negative sequence, harmonic and lower power factor in electric railways with AT or direct power supply, was proposed. The system fully uses the potential of the traction transformer secondary side with three-phase system, and it integrates the three-phase full-bridge active power regulation system with the main transformer omitting step-down transformer. The composition method of the system, the principle of the compensation of the negative sequence and harmonic and reactive power were described. The current detection and control methods were also proposed. According to the actual parameter and measured data in a substation, a system simulation model was built. The results indicate that the proposed system has excellent performance in the compensation of the negative sequence, harmonic and reactive power.