Governance strategies and transaction costs in a renovated electricity market

- Adopted strategies in Brazil's electricity market might differ from TCE predictions.
- Concepts of implementability and reputation enhance explanatory power of TCE models.
- Capital availability might bind adoption of efficient governance strategies.
- Existence of compatible partners binds adoption of efficient governance strategies.
- Self-enforcing incentives prevent special consumers from behaving opportunistically.

This study applies a transaction cost economics (TCE) framework to examine how economic agents adopt governance strategies in Brazil's recently renovated electricity market. In light of a well-established TCE model, four attributes of transactions (i.e., asset-specificity, uncertainty, complexity, and frequency) are examined for three unregulated transactions between generating firms and final consumers. The qualitative analysis of attributes unfolds into a comparative analysis of theory-predicted governance strategies versus strategies observed in the marketplace. It is argued that Williamson's model continues to effectively predict the most efficient governance strategy in the sense of minimizing transaction costs and safeguarding idiosyncratic assets. Misalignment between theory predictions and observations, however, suggests that two additional concepts - implementability and reputation - must be examined alongside with Williamson's four attributes of transactions in order to better explain strategic decisions in Brazil's electricity market. Capital availability, existence of compatible partners, and reputation play crucial roles in explaining those decisions.