The main function of the power grid is to transfer electric energy from generating facilities to consumers. To have a reliable and economical supply of electricity, large amounts of electric energy often have to be transferred over long distances. The transmission system has a limited capacity to transfer electric power, called the transfer capacity. Severe system failures may follow if the transfer capacity is reached during operation. Due to uncertainties, such as the random failure of system components, the transfer capacity for the near future is not readily determinable. Also, due to market principles, and reaction times and ramp rates of production facilities, power flow control is not fully flexible. Therefore, a transfer limit, which is below the transfer capacity, is decided and preventative actions are taken when the transfer reaches this limit. In this thesis an approach to deciding an optimal strategy for power flow control through activation of regulating bids on the regulating power market is outlined. This approach leads to an optimal definition of transfer limits as the boundary between the domain where no bid should be activated and the domains where bids should be activated. The approach is based on weighing the expected cost from system failures against the production cost. This leads to a stochastic impulse control problem for a Markov process in continuous time. The proposed method is a novel approach to decide transfer limits in power system operation. The method is tested in a case study on the IEEE 39 bus system, that shows promising results. In addition to deciding optimal transfer limits, it is also investigated how the transfer capacity can be enhanced by controlling components in the power system to increase stability. / QC 20111010