Distribution system utilities attempt to minimize cost with consideration of the system performance improvement. This paper employs the network reconfiguration and capacitor placement simultaneously to reduce energy losses and improve the system reliability subjected to satisfy operational and power quality constraints using a fuzzy approach. With respect to discrete and non-linear nature of the optimization problem, a Binary Gravitational Search Algorithm (BGSA) is utilized to solve the fuzzy multi-objective problem efficiently. The fast harmonic analysis method is used to perform harmonic power flow in the presence of shunt capacitors and non-linear loads. The state enumeration method based on Weibull-Markov stochastic model of the system components is adopted to assess reliability of different system configurations. Moreover, a new encoding strategy is proposed to boost the performance of network reconfiguration procedure. The IEEE 33-bus and an 83-bus practical distribution network of Taiwan Power Company (TPC) with a number of harmonic generating loads are utilized to test and validate the proposed method, and results are compared with Binary Particle Swarm Optimization (BPSO) algorithm and Binary Genetic Algorithm (BGA).