We propose a Michelson ultrasonic sensing system for detecting the acoustic emission generated by the partial discharge in power transformer. In order to guide the sensor head design in the sensing system for high sensitivity, a theoretical model is established to investigate the effects of the sensor head dimensions on the response sensitivity. After that, an optimized sensor head is designed. In the frequency range from 80 kHz to 200 kHz, whether the PZT sensor is installed in the oil or on the tank, the average response sensitivity of the proposed sensing system is higher than that of the conventional PZT system. When the distance between the sensor head and ultrasonic source is 300 mm in oil, the average detection limit of the Michelson ultrasonic sensing system is about 0.26 Pa, which is about 18.6% of that of the PZT system. Moreover, experiment results show that the detectable partial discharge initial voltage for the proposed optical system is 21.5% lower than that for the PZT system. The enhanced sensitivity makes the Michelson ultrasonic sensing system a potential method to detect the small defects in power transformer.