Taking account of the nonlinear system structure, a rigorous nonlinear analytical approach for the determination of the most effective location of generating units to be equipped with power system stabilizers (PSS) is presented . The method is based on normal form theory and may be used to assess both, nonlinear modal interaction and the effect of control action on system behavior. A dynamical system model is developed based on a second order NF representation of the system, in which the effect of control action on nonlinear behavior is approximated via suitable modification of the initial conditions in the nonlinear coordinate transformations that relate the physical system to the NF coordinates. Making use of this representation, nonlinear PSS sensitivity indices are then proposed to determine the optimum sites to allocate PSS. This technique can predict aspects of the system nonlinear behavior unobtainable from linear approaches and results in improved placement of system controllers. Examples of application of the developed approaches on an IEEE SO-generator test system are presented to estimate controllers' effects on system dynamic performance. The efficacy and accuracy of the method is demonstrated by comparisons to conventional analysis tools.