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The conventional method of power system planning relies on the minimization of system costs subject to meeting given levels of demand and reliability, as well as other constraints. An economic criterion for system optimization is presented here which subsumes the traditional approach by treating the reliability level as a variable to be optimized. The theoretical model which is developed compares the costs with the worth of reliability, and leads to an optimized power system plan in which net social benefits are maximized, or equivalently, the sum of the costs incurred by consumers due to power outages and the system costs is minimized. This approach is more relevant in the national economic context, whereas the traditional system planning technique emphasizes the financial viewpoint of aprivate utility company. Techniques of estimating outage costs and the results of a case study which validates the new methodology are also summarized.