This paper proposes an innovative approach to designing a distributed observer for fault and state estimations in Load Frequency Control (LFC) of time-delayed multi-area interconnected power systems. To reach this goal, the paper first provides exhaustive information and analysis on the structure, disturbances, and faults in multi-area power systems. Then, an L1 observer with the capability to simultaneously estimate the system’s states, process/actuator faults, and sensor faults is proposed. This observer exhibits robustness against various types of disturbances as well as time delays present within both the system and the communication network. The sufficient conditions for designing the proposed observer, guaranteeing the system stability, and minimizing the L1 performance index, are expressed as optimization problems employing Linear Matrix Inequality (LMI) techniques. Additionally, the effectiveness and credibility of the proposed distributed observer in estimating all states and faults in all areas are validated through simulation results.