This paper assesses the issues and options in reforming small electricity sector systems in general while citing Nepal as a specific case. Political instability and increasing electricity demand are two major complicating factors in power sector reform of small systems such as that of Nepal. Lessons from international experience suggest that measures such as cost-reflecting pricing, restructuring and independent regulation are important for the success of reforms. In small systems, the creation of an independent regulatory authority is more important than unbundling of the sector. In the present context of Nepal accounting separation of the main activities may be a pragmatic restructuring approach given the present political and market condition. As the systems gradually grow larger, vertical separation of the system and horizontal splitting of the generation segment and competition in organised wholesale market followed by privatisation remains an option in the long run.