The paper presents a new method for reliability investment decisions when a reward/penalty scheme is applied to the regulation of (distribution system operators) DSOs. The method was developed in order to facilitate the transition from (cost-based regulation) CBR to (performance-based regulation) PBR for distribution utilities. New investment planning criteria for distribution utilities subjected to the new regulatory regime are identified and mathematically formulated as a new (investment efficiency index) IEI, which yields the relation between the improvement of system reliability due to the investment in the electric system and total investment costs. To determine the improvement of system reliability due to the investment in the electric network, the method uses the (Monte Carlo) MC simulation technique for the modeling of the stochastic nature of outages in electric networks, along with a (linear program) LP, which enables us to calculate load flow equations under a fault state and provides information about power deficits in the electric system. The method was tested on Slovenian distribution systems, where several investment candidates were compared in order to determine which projects need to be undertaken in order to achieve the highest possible reliability increase. (C) 2012 Elsevier Ltd. All rights reserved.