This paper presents a new control scheme for a parallel hybrid active filter system intended for harmonic compensation of large nonlinear loads up to 50 MVA, to meet IEEE 519 recommended harmonic standards. The active filter is small rated, 2%-3% of load kilovoltampere rating. The control scheme is based on the concept of synthesizing a dynamically variable inductance, and its usefulness is demonstrated for an active filtering application. A synchronous reference frame (SRF) controller implements the dynamically varying negative or positive inductance by generating active filter inverter voltage commands. This variable inductance controller parallel hybrid active filter system can selectively synthesize multiple "active inductances" at dominant harmonic frequencies without affecting passive filter impedances at all other frequencies. This controller also provides a "current limiting" function to prevent passive filter overloading under ambient harmonic loads and/or supply voltage distortions. Three implementation variations of a parallel hybrid active filter system are presented. This paper also proposes the use of power factor correction capacitors as low cost passive filters for a parallel hybrid active filter system, which are controlled to provide either single or multiple tuned harmonic sinks and to increase cost effectiveness for high power applications. Simulation results validate the proposed variable inductance controller operation for mistuned passive filters.