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Explicit congestion notification (ECN), when used with random early detection (RED) gateways, reduces packet losses and delays of transport control protocol (TCP) based applications. However, choosing the buffer size and optimum parameter values of RED buffers are still open research issues. In this paper, we first present a model to determine the optimal value of RED's maximum threshold to achieve zero packet loss at RED gateways. Secondly, as an application of our model, we propose a new TCP algorithm, called differentiation capable TCP (Diff-C-TCP) to improve the TCP performance over lossy satellite links. Since most of network congestion losses can be eliminated by our zero loss model, Diff-C-TCP assumes packet losses to be indicators of link corruption, and uses ECN to explicitly indicate network congestion. We have shown that our zero packet loss analytical model matches simulation results very well, and our proposed Diff-C-TCP algorithm significantly improve TCP throughput.