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DGs are gaining more importance and they are expected to drastically change the whole distribution system practices. Distribution network will be no longer a passive termination of transmission network and the concept of active network has been recently introduced to indicate a new kind of distribution with DGs actively involved in system management and operation. One of the most important benefits of DGs is reliability improvement. Therefore, in this paper a new methodology, based on system segmentation concept is proposed in order to select the optimum size and location of DGs required to maximize the system reliability. Moreover, a software was developed with the capability of scanning the distribution system in order to divide it into several operational segments based on the utilized protection devices. The reliability of each individual segment as well as the system reliability was evaluated based on selective reliability indices. Nevertheless, more indices can be taken into consideration for the evaluation process. This concept is applied to a practical distribution system, and the results showed that there is a great relation between size and location of DG and reliability improvement.