Guidance Needed on Use of Natural Gas Price Escalator Clauses

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.