In this paper, a new heuristic method is presented for solving the optimal distribution substation service areas. To do this, membership matrix of the fuzzy clustering algorithm is modified and applied to the problem. Moreover, a pseudo-repetitive procedure based on the allocating and locating alternatively (ALA) is used for simultaneously determination of the distribution substation' optimal service areas and capacities. Finally, by solving the distribution substation allocation problem for an actual area by the proposed approach and comparing the obtained results to those of genetic algorithm and prevalent heuristic methods, performance of the proposed method is studied and shown.