Legal Definitions - FERC-out clause

The term FERC-out clause refers to a specific provision found in contracts for the sale of natural gas. FERC stands for the Federal Energy Regulatory Commission, which is a U.S. government agency that regulates the interstate transmission of electricity, natural gas, and oil.

A FERC-out clause allows either the seller or the buyer to modify the contract's terms, typically by reducing the agreed-upon price, or even to terminate the contract entirely. This happens if a regulatory agency, such as FERC, determines that the buyer of the natural gas cannot fully pass on the cost of that gas to its own customers. Essentially, it's a safeguard against situations where regulatory decisions make the original contract price unworkable for the party responsible for distributing the gas to end-users.

• Example 1: Price Adjustment for a Local Utility

  Imagine a large natural gas producer, "Prairie Gas Co.," has a long-term contract to sell natural gas to "City Power & Light," a utility that distributes gas to homes and businesses. The contract specifies a certain price per unit of gas. However, before City Power & Light can pass this cost on to its residential customers, FERC reviews the proposed rates. FERC determines that due to market conditions, the full price Prairie Gas Co. is charging is too high for City Power & Light to pass on to consumers without causing undue hardship. Because their contract includes a FERC-out clause, Prairie Gas Co. and City Power & Light are compelled to renegotiate the price, resulting in a lower per-unit cost for the gas, rather than terminating their essential supply agreement.

  How this illustrates the term: This scenario demonstrates how the FERC-out clause triggers a price reduction when a regulatory body (FERC) prevents the buyer (City Power & Light) from passing the original contract price to its end-users, ensuring the contract remains viable under new regulatory constraints.

• Example 2: Contract Termination for an Industrial Supplier

  Consider "Summit Energy," a natural gas supplier, which has a contract to sell a significant volume of gas to "Industrial Distributors Inc." Industrial Distributors then resells this gas to various manufacturing plants. The contract includes a FERC-out clause. Later, FERC issues a new ruling that caps the maximum price Industrial Distributors Inc. can charge its industrial clients for natural gas, making it impossible for them to recover the price they agreed to pay Summit Energy. Since the regulatory decision makes the original contract economically unfeasible for Industrial Distributors Inc., the FERC-out clause allows them to terminate their supply agreement with Summit Energy, rather than operate at a significant loss.

  How this illustrates the term: Here, the FERC-out clause enables the termination of a contract when a regulatory decision makes it economically impossible for the buyer (Industrial Distributors Inc.) to pass on the agreed-upon costs to its own customers.

• Example 3: Impact on a New Pipeline Project

  A new pipeline company, "Midwest Flow," is constructing a major natural gas pipeline and signs a supply agreement with "Northern Fields Gas," a producer, to ensure a steady flow of gas once the pipeline is operational. Their agreement contains a FERC-out clause. Before the pipeline is completed, FERC announces new, stricter guidelines for pipeline transportation rates, which significantly limit the fees Midwest Flow can charge its customers for moving gas. These new rates mean Midwest Flow cannot afford to pay Northern Fields Gas the originally agreed-upon price and still cover its operational costs and make a profit. The FERC-out clause allows Midwest Flow to approach Northern Fields Gas to renegotiate the supply price, or if a new agreement cannot be reached, to withdraw from the contract without penalty, protecting Midwest Flow from an unworkable financial situation.

  How this illustrates the term: This example shows the FERC-out clause acting as a mechanism for renegotiation or termination when new regulatory guidelines (from FERC) make the initial contract price unsustainable for the buyer (Midwest Flow) to pass on to its own clients.