In the deregulated environment, the economic related problems like generation dispatch, unit commitment, network cost allocation, congestion management, market clearing prices etc. are all associated with the geographical location of the generation companies and the consumers. The number of transmission lines, the distance and the voltage levels are some of the predominant factors in deciding the solution for the above problems for which electrical distance between the utilities is widely used as a tool by the power system researchers. In this paper, a complete analysis has been made on the concept of electrical distance and on the various factors affecting it. A sample five bus system is taken for analysis. The results are quite encouraging and help the researchers to extend the application of electrical distance in various domains. © 2013 Springer.