A PSS parameters coordinated optimization algorithm based on PSO is proposed which improves the transmission capacities of multiple small hydropower station groups by increasing damping ratio of critical low frequency oscillation modes. Firstly, critical low frequency oscillation modes which influence the transmission capacities of small hydropower station groups are calculated. Then generators that participate in the PSS parameters optimization are selected based on the residue index which can comprehensively reflect the controllability and the observability of generators that involved in the critical low frequency oscillation mode. Lastly, the modified searching strategy is proposed to improve the efficiency of the PSO optimization searching. The proposed method is applied in Baoshan, Nujiang and Diqing small hydropower station groups in Dianxi area of Yunnan Power Grid to improve the total transmission capacity in Dianxi area. Simulation results show that the proposed method is feasible and effective.