In the market-based power system operation environment, ancillary services and other interconnected services are necessary to to maintain the secure and reliable operation of the transmission system. Service identification and allocation, together with congestion management, become important functions in the day- ahead scheduling of the independent system operator (ISO);In this dissertation, a general framework for service identification and congestion management was proposed. Based on a set of market model assumptions and the anticipated behaviors of the market participants, the individual profits of the market participants were analyzed. An overall profit maximization was proposed as the desired objective function. Because of limited information available to the ISO, an upper bound cost minimization, which minimizes the upper bound cost of congestion and services, was applied to identify the necessary reactive support and real power loss services,;As a part of the work, a framework for the economic cost analysis of the reactive support and real power loss services was developed in this research. Economic costs are composed of explicit costs and opportunity costs. According to the difference sources of the two services, the explicit and opportunity costs from generation and transmission sources were discussed separately;Since there are costs associated with each service, an average sensitivity allocation method was proposed in this research to allocate the amount and cost of services to various transmission users. It provides accurate allocation results when the services are second-order functions of the transactions. For higher-order service functions, a piecewise average sensitivity method can reduce the mismatches significantly;Test results showed that the ideas and algorithms proposed in this dissertation will not only be applicable to the deregulated power industry, but also to future researchers in this area.