In this thesis, a retail market mechanism that provides differentiated reliability services is proposed. The differentiated reliability services beyond the standard level utilize advanced metering infrastructure, automated distribution reconfiguration and distributed generation (DG). The service quality at the standard level is regulated, while high reliability services are offered through a market mechanism. This proposed market mechanism is designed in two different models of managing the distribution networks. The first model assumes that an independent distribution system operator (DSO) as an administrative firm provides operational support for delivery and reliability services in a retail market, while the second model does not have a DSO. Main reliability market participants are distribution utilities, retail electricity providers (REPs), non-utility-owned DG units, and end users. The REPs, as end users’ representatives and aggregators, purchase delivery service with high reliability level and backup power from the utilities and DG units, respectively. The prices for these services are based on bidding by all market participants. Bids are created by each market participant optimizing its objective with respect to its own interests; therefore, the market participant can assess the investment costs and manage its own risk in setting the service charge. Notably, the proposed market mechanism, which is based on knowing customers’ willingness to pay, and preferences for reliability, aims to give long-term investment signals to service providers for planning investments in new technologies at value. In addition, the provision of high reliability services can be considered a means that enables the service providers to improve system resilience. The modified IEEE Roy Billinton Test System Bus 2 is simulated to demonstrate proof-of-concept for the proposed retail market by showing the iii process of settling the service prices and utilities’ expected compensation design. By comparing the settled service prices between the two market models, we show that the service prices are quite similar, but the number of end users obtaining backup power is different.