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A reliability-based method for allocating the cost of transmission networks is presented. The cost of a transmission line is divided into two components. The first component corresponds to a part of the line capacity, which is used under normal conditions. The second component corresponds to a portion of the line capacity, which is only used under contingency conditions. The latter is the part that market agents use to calculate the reliability benefit charges of the line. In the proposed method, a probabilistic index is defined based on single-contingency analysis, which measures the reliability margin of each line for each transaction. Furthermore, the cost components associated with capacity use and reliability benefit charges are determined based on the actual reliability margin of lines. This method can be used to provide an equitable means for allocating the cost of transmission network among users of a bilateral market model. The proposed method is illustrated in a small power system as well as the 24-bus IEEE-RTS, and its conceptual and computational feasibility are demonstrated.