The transmission loss allocation problem in a deregulated electric power system is first discussed in this paper and then a new method is presented that is applicable under the pool market structure. Given the load flow solution of a network, the method can be implemented easily to allocate active power loss among the market participants. In this approach, a relationship between the bus current injections and the generator or load currents is first determined using a power invariant matrix and then Z-bus matrix is modified, which allows the real power loss of the network to be expressed in terms of generator or load currents. The modified Z-bus method provides the opportunity to allocate total losses to both generators and loads separately. This is while common Z-bus method is only capable of allocating losses to equivalent injected current at each bus. An example, with a six-bus test system is used to illustrate the main steps of the proposed allocation strategy, and numerical results obtained with the IEEE 14-bus system are used to assess the quality of loss allocation procedure. (C) 2010 Elsevier Ltd. All rights reserved.