This paper examines the use of normal form theory to investigate the effects of mode interaction induced by nonlinearity on control performance and design. A general nonlinear analysis procedure based on normal form theory is developed that exploits the nonlinear system structure and closed-form system information provided by normal form analysis to investigate the significance of nonlinear effects in assessing both the location and performance of system controllers. The method generalizes previous power system normal form representations and is expected to provide the basis for more accurate characterization of various aspects affecting control performance and design. Preliminary results of the application of the method to assess placement of PSSs and nonlinear behavior are presented. Examples of the application of the developed approaches on an IEEE 50-generator test system are presented to estimate and interpret the importance of the role of mode interaction in the analysis and location of Power System Stabilizers (PSSs) to aid damping of inter-area oscillations.