| Summary: | Abstract In the restructured electricity markets, transmission usage, usage costs, and loss allocation are critical issues for recovering network embedded and maintenance costs from network users. However, because of the integration of the flexible alternating current transmission system (FACTS) and the occurrence of power system contingencies, this allocation is more complex and critical from the utility's perspective, as it may cause volatility in transmission network costs. In this work, the unified power flow controller (UPFC) is utilized to show the effect of its integration on the system cost and cost allocation. Further, contingency conditions are common in power systems. Therefore, for determining usage, usage cost, and loss allocation volatility under UPFC‐integrated system and N‐1 contingency conditions, this work utilized a power flow tracing‐based transmission usage allocation technique. Reliability factors are used to determine transmission line flows in the event of a failure. Furthermore, contingency line flows are employed to assess transmission tariff volatility in terms of risk premiums. The cost of transmission utilization is recovered using a modified MW‐mile technique. The devised approach was put to the test on a 6‐bus system and an IEEE 14‐bus system.
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