The federal government has agreed to negotiate a financial restructuring of the Muskrat Falls hydro project to make it financially sustainable over the long term, potentially sparing Newfoundland and Labrador from a massive spike in electricity rates, CBC News has learned.

As a first step, Ottawa has temporarily waived conditions of the Muskrat Falls federal loan guarantee, according to sources familiar with the agreement.

Under the terms of that federal loan guarantee, the provincial government is required to set aside money to cover additional cost-overruns on the project, which have doubled in cost to nearly $13-billion since it was first announced a decade ago.

But Ottawa has agreed to a temporary deferment of that condition as part of a package of short-term measures, meaning the provincial government won’t have to borrow hundreds of millions of dollars to cover higher-than-expected costs, at least until the project comes on stream later this year.

Those measures will be back-stopped by the larger federal promise to help secure a long-term financial restructuring of the controversial hydro project, according to multiple sources familiar with the details. 

The 824-megawatt hydro project in central Labrador has been plagued by delays, cost overruns and political controversy in the decade since it was first announced.

In 2010, former Progressive Conservative premier Danny Williams pitched it as a $6.2-billion green energy solution that would bring Labrador power to the island of Newfoundland and into Nova Scotia through a series of subsea cables.

By the time the project was sanctioned in 2012 by Williams’ successor Kathy Dunderdale, the cost estimate had risen to $7.7-billion. It’s now expected to deliver power for the first time in late 2020 with a final price tag that could be more than $13 billion.

Finding a way to keep electricity rates low as those costs spiked has been a key issue in federal-provincial relations for well over a year.

Premier Dwight Ball and federal Natural Resources Minister Seamus O’Regan will announce the specific details Monday afternoon in St. John’s.

Ottawa’s stake in the project is due to the federal loan guarantee first promised by former prime minister Stephen Harper in 2012 when he agreed to guarantee up to $6.3-billion in debt. The Trudeau government increased the loan guarantee by an additional $2.9-billion in 2016.

Finding a way to limit the damage of Muskrat Falls is one of the most pressing political issues in Newfoundland and Labrador. Without significant mitigation, average electricity bills will spike by 75 per cent to cover the cost of the project when it delivers power sometime in late 2020.

Electricity rates would jump from 13 cents per kilowatt hour to just under 23 cents.

The province’s Public Utilities Board — which sets electricity rates — completed a study of mitigation options that found ways to hold rates to 20 cents per kilowatt-hour.

But the utilities board warned that a price increase of that magnitude would be too much to absorb for people in a province with high unemployment, and could make major employers less competitive.

It concluded that limiting rates further would require significant help from the federal government that could include a financial restructuring of the project.

The current provincial Liberal government and its taxpayer-owned energy company, Nalcor, have been trying to find a combination of cost savings and revenue options to cap that massive rate increase.

But that would require hundreds of millions of dollars a year to keep rates low at a time when the provincial government is already running record deficits.

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