The paper critically examines the power sector regulatory and policy environment in the South Asian countries in the context of cross-border power trade. It identifies key issues influencing rapid development of cross-border power trade and provides specific recommendations to address them. The paper concludes that economic power exchange would not happen without the appropriate policies and without harmonizing legal and regulatory frameworks in all the necessary systems. If left to bilateral trading, the status quo of a limited trading regime will leave the vast economic, reliability, and environmental benefits unrealized. Experiences across the world show that such legal and regulatory changes can be accomplished successfully.