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This paper presents an optimal allocation method for flexible ac transmission system (FACTS) devices for market-based power systems considering congestion relief and voltage stability. The purpose of the FACTS devices installation is to provide benefit for all entities accomplished by both minimizing annual device investment cost and maximizing annual benefit defined as difference between expected security cost (ESC) with and without FACTS devices installation. Different from previous approaches, the proposed method accurately evaluates the annual cost and benefits obtainable by FACTS devices installation by formulating a large-scale optimization problem that contains power flow analyses for a large number of system states representing annual power system operations. In addition, dynamic state transitions caused by specified contingencies are also simulated in the optimization problem to evaluate the effect of FACTS control actions as well as the other coordinated controls. The expected cost consists of operating cost under normal and contingency states along with their related probabilities to occur. Maximizing social welfare is the objective for normal state while minimizing compensations for generations re-scheduling and load shedding as well as maximizing social welfare are the objectives in case of contingency. Although installation cost of FACTS devices is required, they are useful as cost free means, which can reduce effectively the annual costs for generations re-scheduling and load shedding. [ABSTRACT FROM PUBLISHER]