Smart sensors and monitoring technologies are beginning to penetrate different levels of the power system. In a smart grid scenario, the operational condition of components needs to be reported to the control center, in order to improve the remedial action for an ailing component. This will significantly reduce the component failure rate and improve reliability of the entire system. This paper proposes a Markov model to quantify the reliability of a component in the presence of smart monitoring. A mathematical formulation based on the absorbing state concept is used to calculate the failure rate of the monitored component. A numerical analysis is performed to evaluate the impact of some parameters on the failure rate of the monitored component.