459 U.S. 400 (1983), 81-1370, Energy Reserves Group, Inc. v. Kansas City Power & Light Co.

Docket Nº:No. 81-1370
Citation:459 U.S. 400, 103 S.Ct. 697, 74 L.Ed.2d 569
Party Name:Energy Reserves Group, Inc. v. Kansas City Power & Light Co.
Case Date:January 24, 1983
Court:United States Supreme Court

Page 400

459 U.S. 400 (1983)

103 S.Ct. 697, 74 L.Ed.2d 569

Energy Reserves Group, Inc.


Kansas City Power & Light Co.

No. 81-1370

United States Supreme Court

Jan. 24, 1983

Argued November 9, 1982



In 1975, appellee public utility entered into two intrastate contracts with appellant's predecessor-in-interest to purchase wellhead and residue gas from a certain gas field. Each contract contains a "governmental price escalator clause," which provides that, if any governmental authority fixes a price for any natural gas that is higher than the contract price, the contract price shall be increased to that level, and a "price redetermination clause," which gives appellant the option to have the contract price redetermined no more than once every two years by averaging the prices being paid under three other gas contracts chosen by the parties. If the price is increased pursuant to either clause, each contract requires appellee, within specified time periods, to seek from the Kansas Corporation Commission (Commission) approval to pass the increase through to consumers. If pass-through approval is refused and appellee elects not to pay the increase, appellant has the option to terminate the agreement. Pursuant to the price redetermination clauses, the parties agreed on a higher price to be effective November 27, 1977, the Commission approved the pass-through of the increase to consumers, and appellee paid the new price through 1978. Effective December 1, 1978, the Natural Gas Policy Act of 1978 replaced earlier federal price controls for interstate natural gas with gradually increasing price ceilings, including a ceiling for newly discovered or newly produced gas (§ 102) and a lower ceiling for categories of gas not otherwise covered by the Act (§ 109). The Act also extended federal price regulation [103 S.Ct. 699] to the intrastate gas market, providing in § 105(b)(1) that the ceiling price for intrastate gas shall be the lower of the § 102 price and "the price under the terms of the existing contract, to which such natural gas was subject on [November 9, 1978]." As authorized by the federal Act, the Kansas Natural Gas Price Protection Act was enacted in May, 1979, imposing price controls on the intrastate gas market with regard to contracts executed before April 20, 1977, and prohibiting consideration either of ceiling prices set by federal authorities or of prices paid in Kansas under other contracts in the application of governmental price escalator and price redetermination clauses. However, the Kansas Act permits indefinite price escalator clauses to operate after March 1, 1979, to raise the price of "old" intrastate gas up to the federal Act's § 109 ceiling price. In November, 1978,

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appellant notified appellee that gas prices would be escalated to the § 102 price pursuant to the governmental price escalator clauses, but appellee, after failing to obtain pass-through approval because of its failure to file a timely application with the Commission, elected not to pay the higher price, and appellant then sought to terminate the contracts. When appellee contended that the governmental price escalator clauses were not triggered by the federal Act, and that the Kansas Act prohibited their activation, appellant filed suit in a Kansas state court, seeking a declaratory judgment that it had the contractual right to terminate the contracts. Appellee later rejected appellant's request under the price redetermination clauses for a price increase, to be effective in November, 1979, contending that the Kansas Act had extinguished appellee's obligation to comply with those clauses. Appellant then filed an amended complaint, alleging that it was entitled to terminate the contracts because of appellee's refusal to redetermine the price. Appellee counterclaimed for a declaratory judgment that the contracts were still in effect. The trial court entered summary judgment for appellee, holding that the federal Act's imposition of price ceilings on intrastate gas did not trigger the governmental price escalator clauses, and that the Kansas Act did not violate the Contract Clause of the Federal Constitution. The Kansas Supreme Court affirmed.


1. The Kansas Act does not impair appellant's contracts with appellee in violation of the Contract Clause, and thus the contract price may be escalated under either escalator clause only to the ceiling under § 109 of the federal Act, not to the § 102 ceiling. Pp. 409-419.

(a) The Contract Clause's prohibition of any state law impairing the obligation of contracts must be accommodated to the State's inherent police power to safeguard the vital interests of its people. The threshold inquiry is "whether the state law has, in fact, operated as a substantial impairment of a contractual relationship." Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244. If a substantial impairment is found, the State, in justification, must have a significant and legitimate public purpose behind the regulation. Once such a purpose has been identified, the adjustment of the contracting parties' rights and responsibilities must be based upon reasonable conditions, and must be of a character appropriate to the public purpose justifying the legislation's adoption. Pp. 410-413.

(b) Here, the Kansas Act has not impaired substantially appellant's contractual rights. The parties are operating in a heavily regulated industry, and the statement of intent in their contracts made clear that the escalator clauses were designed to guarantee price increases consistent with anticipated regulated increases in the value of appellant's gas, not

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that appellant expected to receive deregulated prices. Moreover, the contract provision making any contractual term subject to relevant present and future state and federal law suggests that appellant knew its contractual rights were subject to alteration by state price regulation. Pp. 413-416.

(c) To the extent, if any, the Kansas Act impairs appellant's contractual interests, [103 S.Ct. 700] it rests on significant state interests in protecting consumers from the escalation of natural gas prices caused by deregulation, and in correcting the imbalance between the interstate and intrastate markets by permitting the intrastate prices to rise only to the § 109 level. Nor are the means chosen to implement these purposes deficient, particularly in light of the deference to which the Kansas Legislature's judgment is entitled. Pp. 416-419.

2. The Kansas Supreme Court did not err in holding that the enactment of § 105 of the federal Act did not trigger the governmental price escalator clauses in these contracts so as to entitle appellant to a price increase on December 1, 1978. As a matter of federal statutory interpretation, the federal Act does not trigger such clauses automatically. By the language of § 105(b)(1), Congress set a ceiling for the operation of contractual provisions; it did not prescribe a price. And the Kansas Supreme Court's holding that the particular governmental price escalator clauses involved here were insufficient to escalate the gas price is an interpretation of state law to which this Court defers. Pp. 419-420.

230 Kan. 176, 630 P.2d 1142, affirmed.

BLACKMUN, J., delivered the opinion of the Court, in which BRENNAN, WHITE, MARSHALL, STEVENS, and O'CONNOR, JJ., joined, and in all but Part II-C of which BURGER, C.J., and POWELL and REHNQUIST, JJ., joined. POWELL, J., filed an opinion concurring in part, in which BURGER, C.J., and REHNQUIST, J., joined, post, p. 421.

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BLACKMUN, J., lead opinion

JUSTICE BLACKMUN delivered the opinion of the Court.

This case concerns the regulation by the State of Kansas of the price of natural gas sold at wellhead in the intrastate market. It presents a federal Contract Clause issue and a statutory issue.


On September 27, 1975, The Kansas Power & Light Company (KPL), a public utility and appellee here, entered into two intrastate natural gas supply contracts with Clinton Oil Company, the predecessor-in-interest of appellant Energy Reserves Group, Inc. (ERG). Under the first contract, KPL agrees to purchase gas directly at the wellhead on the Spivey-Grabs Field in Kingman and Harper Counties in southern Kansas. The second contract obligates KPL to purchase from the same field residue gas, that is, gas remaining after certain recovery and processing steps are completed. The original contract price was $1.50 per thousand cubic feet (Mcf) of gas. The contracts continue in effect for the life of the field or for the life of the processing plants associated with the field.


Each contract contains two clauses known generically as indefinite price escalators. The first is a governmental price escalator clause; this provides that, if a governmental authority fixes a price for any natural gas that is higher than the price specified in the contract, the contract price shall be increased to that level.1 The second is a price redetermination

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clause; this gives ERG the option to have the contract price redetermined no more than once every two years.2 The new price is then set by averaging the prices being [103 S.Ct. 701] paid under three other gas contracts chosen by the parties.

When the price is increased pursuant to either of these clauses, each contract requires KPL to seek from the Kansas Corporation Commission (Commission) approval to pass the increase through to consumers. App. to Juris.Statement 69a. The application for approval is to be submitted within 5 days after a price increase resulting from governmental action,

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or no fewer than 60 days before a price redetermination increase is to become effective. Ibid. If the Commission...

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