In the framework of spot price theory， the practical aspects and theoretical foundations of the loss factor method adopted by East China Power Market are analyzed. This paper validates that the adopted loss factor method is consistent with microeconomics-based spot price theory， which can satisfy the market requirements of justice， fairness， publicity. Detailed simulation results show that the selected reference bus of loss factor allocation is reasonable. The loss factor method applied in East China Power Market can help market participants to attach importance to efficiency of electrical generation， transmission and distribution. It can also make contribution to achieving the strategic objective of energy saving and loss reduction in East China Power Market.