With introducing demand response aggregator (DRA) in smart paradigm, small customers can actively participate in price and incentive-based demand response programs. This new matter can significantly affect many factors of power system such as transmission network security. Accordingly, it is notably useful to define an adjusted framework for transmission expansion planning in smart environment. A long-term market simulation is performed using a tri-level iterative framework to find the best expansion decisions for transmission company (TransCo) in a pool-based market. The TransCo's investment decisions are made by a merchant approach consistent with transmission network security and smart environment. The effects of smart environment on future network configuration, strategic bidding of generators in the market operation, and contingency analysis are considered during planning process. The effectiveness of proposed method is examined on the IEEE 24-bus system with one DRA, one TransCo, and two generation companies under the independent system operator's supervision. Copyright (c) 2016 John Wiley & Sons, Ltd.