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In Brazil, ninety percent of total electric power comes from renewable sources, where hydropower represents 2/3 of the national energy matrix. In 2012, the new Federal Forest Code eliminated environmental protection along drainage divides and reduced the mandatory width of riparian zones, allowing for land cover change in these environmentally sensitive areas. The conversion of forestlands to agriculture will subject hydroelectric reservoirs to a growing load of sediments, shortening their useful life. In this study of the Furnas hydropower plant and its contributing basin, in the upper reaches of the Rio Grande, a re-evaluation of factors that determine the distribution of finances accrued from hydroelectric generation is recommended. Under the current policy, royalties are paid by the Furnas facility to states and municipalities in direct relation to the area of land flooded by its reservoir, whereas contributing rainfall precipitating in municipalities upstream of the lake is not considered. Currently, the 31 municipalities with lands flooded by the reservoir receive an average of R$ 213,107 (US$ 67,226) annually, while the remaining 172 municipalities in the basin receive no water royalties. In the proposed approach to redistribute these funds, each of the 203 municipalities will receive compensation determined by their contributing catchment area, averaging R$32,543 (US$ 10,266) per year. By considering distribution of rainfall in order to equitably allocate hydroelectric royalties, a system for the payment of environmental services is conceived. Such a system intends to incent stakeholders to protect or replant native forests along drainage divides and riparian zones, in recognition of the value this vegetation has in the reduction of long term costs for hydroelectric facilities. [ABSTRACT FROM AUTHOR]