Negotiating a deal to operate a power plant in the Amazon is no easy task. Rosie Cresswell talks to the legal teams that helped Madeira Energia manage it.

Indigenous inhabitants, loggers, governments, the ecosystem – they all have a fervent interest in the Amazon rainforest, which makes bidding for a concession to operate one of Brazil’s largest power plants there far from straightforward.

When Brazil’s electricity regulator, Agência Nacional de Energia Elétrica (ANEEL), held a public auction for a concession to build and operate a US$5.6 billion power plant alongside the Madeira River, it made clear that the bidder offering to supply the lowest-cost electricity would win.

Madeira Energia, a consortium led by Brazilian group Odebrecht and Furnas, a public-sector generating company, won the concession for the Santo Antônio plant, outbidding France’s Suez Energy and other Brazilian construction and energy groups. Adriano Maia, in-house counsel to Odebrecht, trumpets it as a return to large-scale investment in Brazilian infrastructure. “The government managed the project well: the population gets low tariffs and the investor gets a great return,” he says.

While all parties might be content with the outcome, securing a victory in fact required a lot more than guaranteeing a low electricity tariff. The power plant is the largest ever to be built in Brazil by the private sector, requiring changes in Brazil’s energy regulation. It is also in the heart of the Amazon – an area fiercely defended by environmentalists. Drafting agreements to protect investors, service providers, banks and insurers; fighting lawsuits filed by environmental groups; and sticking to electricity and environmental regulations all needed to be dealt with by the consortium’s lawyers.

Assisting Madeira were Motta, Fernandes Rocha – Advogados, Wald e Associados Advogados and Mattos Muriel Kestener. The consortium also received support from Advocacia Bettiol for litigation advice and from Santoro Fonseca Advogados on environmental law matters.

Odebrecht has an 18 per cent stake in Madeira, and Furnas 39 per cent. Other consortium members include Spanish bank Banco Santander and Portuguese bank Banif, which share a 20 per cent stake via a fundo de investimento em participações, a special fund for foreign investors. Andrade Gutierrez, a Brazilian construction and engineering group, has a 12.4 per cent stake, and CEMIG, an electricity generator controlled by the state of Minas Gerais, owns 10 per cent in the consortium.
(…)

An engineering, procurement, and construction (EPC) agreement and the operation and maintenance (O&M) agreement also had to be drafted. This was overseen by Wald e Associados, which also provided regulatory advice. The contract agreements had to take into account potential environmental and corporate risks, so there were complex discussions over the EPC contract and the level of guarantee needed.

The EPC contract is one of Brazil’s first lump sum turnkey contracts for infrastructure, so regulatory changes were required from ANEEL, as Wald explains: “We had to take into account advance purchases of rising amounts of energy produced. We defined transmission charges to be paid during the first 10 years of operation. And there was the introduction of arbitration as a means of resolving disputes arising under the concession contract.”

The adoption of these changes was the result of legal opinions, meetings and a public hearing. Wald believes these three aspects are fundamental for sustaining the success of the project, and will have major significance for future infrastructure projects.

For Wald, one of the transaction’s biggest highlights was the introduction of arbitration to the contract, “which represents the most extraordinary innovation in ANEEL’s regulatory practice”. Although arbitration has recently been adopted as a general procedure to resolve conflicts between private companies in the energy sector, ANEEL has never been subjected to an arbitration clause before. “We expect this change to have profound effects as the first initiative to avoid state jurisdiction in resolving some specific disputes related to a concession contract signed by ANEEL,” Wald says.

Madeira Energia has faced legal wrangles since its interest in the project began in 2001. The consortium won the concession by offering a tariff of 79 reais (US$45) per megawatt hour produced – down from the maximum bid of 122 reais (US$69) set by ANEEL. Producing energy at such a competitive price does not sit easily with protecting the environment and indigenous inhabitants.

To meet environmental concerns, Madeira used the Equator Principles as its benchmark – a reference used by the financial industry to manage social and environmental issues in project financing. Odebrecht and Furnas undertook environmental studies and held discussions with relevant members of society.

Despite this, the consortium faced lawsuits disputing the project’s environmental licence. In order to ease the doubts raised by the authorities, banks and the local inhabitants of Porto Velho, a list of conditions were included within the project’s licence. “As a result of negotiations with the regulatory environment authority, numerous requirements aiming to protect the environment were set forth in the preliminary licence for the project,” says Wald.
(…)

The funding for this infrastructure project, expected to reach US$5.6 billion, will be raised from 75 per cent debt and 25 per cent equity. Legal planning for the financing is still being negotiated, but it will be in part provided by development bank BNDES, which published its own set of requirements for the consortium to adhere to. Private banks are also expected to take part.

Building the project’s financial structure – bearing in mind its enormous capital expenditure and the fact that revenues will be in reais – proved an onerous task. “Drafting contractual arrangements and completion guarantees for the project, which will be financed on a non-recourse basis, required very sophisticated and creative solutions,” says Odebrecht’s in-house counsel Maia.
(…)

Two mega hydropower plants are planned as part of Brazil’s economic development programme alongside the Madeira River in the state of Rondonia. Santo Antônio represents some 25 per cent of the total installed capacity of the Itaipu hydroelectric plant – the largest contributor to Brazil’s electricity system – and will soon be joined by the similar Jirau hydroelectric power plant, to be auctioned in May. Having created such a tight legal structure for Santo Antônio, Madeira’s legal teams may well have put their client in pole position for Jirau.

Counsel to Madeira Energia

In-house counsel to Odebrecht – Adriano Maia
(…)

For contracts and regulatory matters

Wald e Associados Advogados

Partners Arnoldo Wald, André Serrão Borges de Sampaio, Luiza Rangel de Moraes, Ivo Waisberg and Maria Augusta da Matta Rivitti, and associates Giovanna Mazetto Gallo, Igor Carneiro de Matos and Mariana Cabezas
(...)

Source: Latin Lawyer