The two branches of the New Institutional Economics (NIE), Institutional Environment and Transaction Cost Economics (TCE), apparently lack several causal explanations. Namely, the former has not fully explained why and how substantial institutional change occurs; and the latter fails to provide formal reasons for why firms may adopt governance strategies that differ from the efficient one to support exchange in a certain industry. In this thesis, the Brazilian electricity sector is used as a case study to analyze how institutions of electricity evolved from a state-dominated structure to a competitive market-oriented organization. Sequentially, the adequacy of the classic TCE framework in explaining how economic agents adopt governance strategies is evaluated. Based on an extensive literature review and structured personal interviews with sector experts, results indicate that institutional changes were driven by `high levels of uncertainty', `economic recession', and `reliability of utility services'. Moreover, results support the existence of gaps in the classic TCE framework and recognize necessary refinements in two additional concepts. In the light of those concepts, this thesis concludes that (i) some transactions conducted in the regulated market channel would be governed differently if parties were authorized by the institutional framework to choose their strategies; (ii) free market channel players choose governance strategies that are not always aligned with the TCE predicted governance because capital availability, existence of compatible partners, and reputation play crucial roles in determining strategic decisions.
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