This paper presents a modified power supply system based on the current alternating current (AC)-fed railways with neutral zones that can further improve the eco-friendliness and smart level of railways. The modified system complements the existing infrastructure with additional energy-storage-based smart electrical infrastructure. This infrastructure comprises power electronic devices with energy storage system connected in parallel to both sides of each neutral zone in the traction substations, power electronic devices connected in parallel to both sides of each neutral zone in section posts, and an energy management system. The description and functions of such a modified system are outlined in this paper. The system allows for the centralized- and distributed-control of different functions via an energy management system. In addition, a control algorithm is proposed, based on the modified system for regenerative braking energy utilization. This would ensure that all the regenerative braking energy in the whole railway electrical system is used more efficiently. Finally, a modified power supply system with eight power supply sections is considered to be a case study; furthermore, the advantages of the proposed system and the effectiveness of the proposed control algorithm are verified.