In this paper, an approach for optimal allocation of flexible AC transmission system (FACTS) devices under deregulated power systems is presented. The approach considers system operation under normal and contingency states along with their related probabilities to occur. For each state, FACTS devices are optimally utilized to minimize operating cost. If a contingency occurs, preventive/corrective control strategy is applied to prevent voltage collapse as well as to relieve transmission congestion. During corrective control, fast control action is utilized while during preventive control, both fast and slow control actions are employed. The objective of normal state is to maximize social welfare while the objectives of contingency states are to maximize social welfare and to minimize compensations paid for generations re-scheduling and load shedding. The overall problem is formulated as a mixed integer nonlinear programming problem and is solved using hybrid Particle Swarm Optimization. The effectiveness of the proposed approach is demonstrated on modified IEEE 14 bus test system.