Small‐signal and transient stability of a power system can be improved by installing power system stabilizers (PSSs) inside the excitation controls of the generators. Nonetheless, designing and tuning the PSSs' parameters to suit all operating conditions is a complex and difficult task. Therefore, a new control scheme integrating the principles of the energy function and the functional sensitivity is proposed in this paper. The performance of this control scheme in terms of critical clearing time, simulated dynamic responses, and power oscillation damping was examined using the IEEJ West 10‐ machine test system. Test results reveal that the proposed scheme can improve both small‐signal and transient stability performances under various operating conditions and contingencies. © 2015 Institute of Electrical Engineers of Japan. Published by John Wiley & Sons, Inc.