Water is harmful in power equipment because it is attracted to the places of greatest electrical stress. Water accelerates the deterioration of both the insulating oil and the paper insulation, liberating more water in the process (heat catalyzed). This is a never ending circle and once the paper insulation has been degraded (loss of mechanical strength), it can never (unlike the oil) be returned to its original condition.

Water can originate from two sources as follows:
1. Atmospheric
Via the silica gel breather (dry silica gel is always blue).
Via leaks into the power equipment, for example, bad gasketing, cracked insulation, a loose manhole cover, a ruptured explosion diaphragm etc.

2. Internal Sources
Paper degradation produces water.
Oil degradation produces water.
Wet insulation contaminates the oil.

If the moisture content of the oil is too high, vacuum degassing and filtering will usually bring it down to an acceptable level.