In this paper, power quality at the distribution system has been examined by introducing an observer based control technique with fuzzy logic controller for wind energy conversion systems with constant wind velocity, for combination of linear, nonlinear loads and with load removal in one of the phases. The power quality improvement, including voltage regulation and reactive power management on the distribution side is achieved and the device used here is a distributed static compensator (DSTATCOM) a voltage source converter(VSC) based power electronic device. The performance is found to be satisfactory with the implementation of DSTATCOM for better voltage regulation with self-sustained DC link voltage at VSC of DSTATCOM. The fuzzy logic controller is used to generate gate pulses to VSC for power quality improvement and is simulated in MATLAB environment and results are studied.