I'm referring to a network that is monitored and load balanced by computer. Also one in which the fault tolerance is at least somewhat well understood. Currently the system is much more reactionary in nature and small disturbances in one part of the grid can ripple through the grid unpredictably causing spikes and valleys where they don't need to be. The topology of the network isn't that well understood either, for example it's not well understood which power distribution nodes are keystones that can cause major fail overs if taken out. This is my understanding anyway.
"Smart grid" certainly includes better monitoring of the distribution system, and I have to presume that being "load balanced by computer" is a reference to the kind of control over customer loads that I described earlier.
Your suggestion that "fault tolerance" is not well understood is IMHO not correct. Despite the mind-boggling sizes of the electrical networks (the western interconnection spans the western half of North America and connects together everyone with electrical service), the utilities run sophisticated simulations to model the response of the electrical system to all sorts of disturbances (and combinations of disturbances) to ensure that any transient fluctuations that "ripple through the grid" are within established limits. We definitely know what the "keystones" are, and by their very nature, none of them are at the distribution level. That isn't to say, however, that a chain of unlikely disturbances can't lead to a serious outage (e.g. the recent San Diego blackout).
The kind of disturbances that occur on the distribution systems ("smart grid" territory) are by their nature localized and generally only affect other customers on that feeder. "Smart grid" may be able to shorten these impacts on other customers through quicker switching actions; the additional data should also help us troubelshoot probelms more quickly.
For better or worse, the electrical system will always need to be reactionary in the sense that it must respond gracefully to unexpected occurances. At least until we can accurately forecast which trees will fall during the next storm (whenever that will be) or which pole will be toppled by the next drunk driver. :\