The treaty would increase Paraguay's income from energy generated by the Itaipu dam on the shared Parana River to $360 million, money that Paraguay's President Fernando Lugo wants to spend on agrarian reform to benefit 300,000 landless peasant families.
It also calls for Brazil to invest in high-capacity power lines across Paraguay, creating an energy grid that could help one of South America's poorest countries reshape its agricultural economy.
The treaty, signed by Lugo and Luiz Inacio Lula Da Silva on July 25, was quickly approved by Paraguay's congress, but lawmakers in Brazil have yet to move the plan out of the first of four committees due to consider it partly because what Brazil mostly gets from the deal is good relations with its poorer neighbor.
"It is controversial. It's not a simple matter, because it carries more benefits for Paraguay than Brazil," Brazilian Rep. Severiano Alves, a member of the lower house's foreign relations committee, told The Associated Press.
He said both houses of Congress would probably vote on it in the first half of 2010.
Carlos Mateo Balmelli, Itaipu's Paraguayan director, has lobbied for the agreement, but Alves says Brazil should not be pressured.
"They didn't pay anything to build the dam they just provided territory and water from the river. Brazil was the one that assumed the cost of financing Itaipu," Alves said.
Itaipu's 20 huge turbines generate electricity divided equally between the neighbors, but Paraguay's much smaller population and economy consumes the energy of only one turbine. The current treaty forces Paraguay to sell its excess capacity to Brazil until 2023, without the possibility of selling the energy elsewhere, at far less than market prices.
The new treaty would increase Paraguay's income from $5.10 to $15.30 per megawatt/hour for excess power sold to Brazil. Lugo said the proposal has already succeeded in overcoming Paraguay's isolation, a legacy of Alfredo Stroessners 1954-1989 dictatorship.
The existing treaty was signed in 1973, before the dam was built. Both countries took on loans to build it debt that now totals $17 billion. But Paraguay doesn't recognize $8 billion of it because it considers the debt to be illegally obtained by corrupt officials of the former government.