This paper deals with decentralized control scheme and its application to multi-machine power systems. Decentralized control scheme has several practical advantages, because power system has geographically distributed characteristics. In this paper, decentralized observer-based optimal Power System Stabilizer(PSS) and Thyristor-Controlled Series Capacitor(TCST) controller are designed and tested in WSCC 9 bus system with one TCSC installed. Simulation results show that the proposed decentralized controller has satisfactory performances comparable to the centralized controller. In addition, using modal analysis, this paper shows that the proposed decentralized controller significantly affects only one pair of eigenvalues which have high participation with each generator, while slightly affects other eigenvalues. This result indicates that the application of the decentralized control scheme to enhance power system dynamic stability via excitation control have potential advantages because each low-damped mode occurs dominantly by each decentralized subsystem.