Smart grid is a power grid consists of extensive monitoring systems which deal with the monitoring of attributes such as current, voltage, power, and energy at distribution transformers, substations transformers, distribution switching devices and smart meters. Smart grid with advanced communication technologies can be used for several purposes such as efficiency and reliability improvement. IEC 61850 is the core standard in the smart grid domain for distribution and substation automation. This paper introduces a vision of modern substation and distribution systems using the IEC 61850. Network operators mainly assume that the modern substation and distribution systems based on the IEC 61850 are reliable for a long-time of operation. However, similar to any other systems, the implemented IEC 61850 might fail because of the operational failures or aging failures. This paper proposes a novel method for reliability evaluation of modern substation and distribution systems. A typical IEC 61850 based distribution and substation system is developed and analyzed using the proposed method. The fault tree analysis (FTA) is used to quantify the reliability of the system. The technique is implemented and demonstrated on the Roy Billinton test system (RBTS). The analysis is further extended on a 400/63 kV substation with a breaker- and-a-half configuration. In addition, the technique proves to be robust under different operations. The results verify the feasibility and applicability of the proposed method.