Guidance Needed on Use of Natural Gas Price Escalator Clauses

EMD-80-53: Published: Jul 25, 1980. Publicly Released: Jul 25, 1980.

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Price escalator clauses permit producers to raise the initial price of natural gas over a period of time or to raise the price when some outside event occurs. In December 1978, the Federal Energy Regulatory Commission (FERC) issued interim regulations implementing the Natural Gas Policy Act of 1978. FERC stated that establishing maximum lawful prices under the act would not trigger any indefinite price escalator clauses in existing interstate or intrastate contracts. However, in March 1979, FERC stated that it would not prevent price escalator clauses from operating to obtain the maximum lawful prices under the act. The FERC initial decision, as well as its reversal, has created controversy over the treatment of price escalator clauses.

The examination of the act and its legislative history by GAO disclosed that neither FERC nor Congress clearly addressed whether price escalator clauses in existing interstate contracts can be used to obtain the maximum prices under the law. In a report to Congress, FERC stated that producers could charge the maximum lawful prices if the language in their contracts so permitted. However, no explanation was given as to what type of language in the contracts would constitute contractual authority. Similarly, the act contained no reference to price escalator clauses in existing intrastate contracts other than to discuss how they would be handled after 1984. Further, GAO found that FERC failed to assess the economic impact of the escalator clauses on natural gas consumers. The controversy over the usage of escalator clauses has led to price increases ranging from a few cents to over $2 per million British thermal units above prices charged prior to the passage of the act.

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