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An improved algorithm to evaluate and allocate transmission losses in an open electricity market using an incremental method is reported. There is no exact analytical method to allocate transmission losses to market participants such as generators, loads and transactions because the total loss is a complex function of the power injection, system voltage and operational arrangement. The authors propose an incremental approach in conjunction with Newton's method in the marginal-loss calculations. This achieves loss allocations that are nonarbitrary and consistent with optimal power system operation. Transmission losses are allocated incrementally to generators, loads and transactions in proportion to their impact on nodal power changes. The method is tested on IEEE test systems as well as on the Hong Kong distribution system and the Victorian transmission system, state of Victoria, Australia. It is shown that, in contrast to current methods, the proposed integration approach accounts accurately for all transmission losses in these systems, whilst at the same time, loss allocation is done in an objective way without using any arbitrary parameters or allocation strategies.