Legal Definitions - FPC clause

The term FPC clause is an acronym for Federal Power Commission clause. It is also commonly known as an Area-Rate Clause.

An FPC clause is a specific provision historically included in contracts, particularly within the natural gas industry. Its purpose was to allow for the automatic adjustment of the price of natural gas based on rates set by the Federal Power Commission (FPC) or its successor agency, the Federal Energy Regulatory Commission (FERC). These clauses were designed to ensure that long-term gas supply contracts could adapt to changes in government-mandated price ceilings, known as "area rates," which were uniform prices established for gas produced within specific geographic regions. If the FPC or FERC increased the maximum allowable price for gas in a given area, an FPC clause would automatically trigger a corresponding price increase in the contract, eliminating the need for renegotiation.

• Example 1: Long-Term Gas Supply Agreement

  A natural gas producer in Oklahoma enters into a 15-year contract to sell gas to an interstate pipeline company. The contract includes an FPC clause specifying that the price paid for the gas will automatically adjust to any new area rates established by the Federal Power Commission (or later, FERC) for that production region. If FERC subsequently issues an order raising the maximum allowable price for gas in Oklahoma from $2.50 to $3.00 per million British thermal units (MMBtu), the pipeline company immediately begins paying the producer $3.00/MMBtu, without requiring any amendment or renegotiation of the original contract.

  This example illustrates how the FPC clause provides a built-in mechanism for price changes in response to regulatory decisions, ensuring that the contract price remains aligned with government-set ceilings over an extended period.

• Example 2: Royalty Agreement for Gas Production

  A landowner leases their property to an energy company for natural gas exploration and production. Their royalty agreement stipulates that the landowner will receive a percentage of the "regulated wellhead price" of the gas sold. The underlying sales contract between the energy company and its buyer contains an FPC clause. When the FPC/FERC increases the area rate for gas in that specific field, the price received by the energy company for its gas automatically rises due to the FPC clause. Consequently, the "regulated wellhead price" used to calculate the landowner's royalty also increases, leading to higher royalty payments for the landowner.

  Here, the FPC clause in the primary sales contract indirectly impacts the landowner's income, demonstrating how regulatory price adjustments flow through to other stakeholders whose financial interests are tied to the regulated price of gas.

• Example 3: Inter-Company Gas Purchase Agreement

  A smaller independent gas exploration firm agrees to sell all its produced natural gas to a larger utility company that distributes gas to residential and commercial customers. Their agreement incorporates an FPC clause. Several years into the contract, the Federal Power Commission (or FERC) revises its pricing regulations and increases the maximum permissible price for natural gas in the independent firm's production area. Due to the FPC clause, the price the utility company pays to the independent firm for its gas automatically escalates to meet the new regulatory ceiling, without any further negotiation between the two companies.

  This scenario highlights how the FPC clause simplifies price adjustments for both buyer and seller in a regulated market, allowing producers to benefit from favorable regulatory changes and ensuring buyers pay a price consistent with government guidelines without constant contract modifications.