ENERGY RESERVES GROUP, INC. V. KANSAS POWER & LIGHT CO.
459 U.S. 400 (1983)
NATURE OF THE CASE: 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.
FACTS: Kansas Power & Light Company (KPL), a public utility and appellee, entered into
two intrastate natural gas supply contracts with Clinton Oil Company, the
predecessor-in-interest of appellant Energy Reserves Group, Inc. (ERG). Each contract
contains two clauses known as indefinite price escalators. The first is a governmental price
escalator 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. The second a price redetermination clause gives ERG the option to have the contract
price redetermined no more than once every two years. The purpose of the price escalator
clauses is 'solely' to compensate ERG for 'anticipated' increases in its operating costs and
in the value of its gas. The contract also provides a hold harmless due to compliance with,'
any 'relevant present and future state and federal laws.' The Natural Gas Policy Act of 1978
(Act), replaced the federal price controls established under the Natural Gas Act, with price
ceilings that rise monthly. The new Act extended federal price regulation to the intrastate
gas market. The Act, also permits a State to establish or enforce any maximum lawful price
for the first sale of natural gas produced in such State which does not exceed the
applicable maximum lawful price, if any, under title I of this Act. The Kansas Legislature
imposed price controls on the intrastate gas market applying only to natural gas contracts
executed before April 20, 1977, and controls natural gas prices until December 31, 1984. It
prohibits 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
clauses and price redetermination clauses. On November 20, 1978, ERG and other gas suppliers
notified KPL that gas prices would be escalated to the 102 price on December 1, pursuant
to the governmental price escalator clause. KPL missed a deadline to apply to the Commission
for pass through authority. On June 5, 1979, ERG notified KPL that it would terminate the
contracts within 30 days because KPL had failed to obtain Commission approval, and had
failed to pay the increased required by the governmental price escalator clause. KPL's
contends that the Kansas Act prohibited its activation. ERG sued in the District Court of
Harper County praying for a declaratory judgment that it had the contractual right to
terminate the contracts. The state trial court held that the Act's imposition of price
ceilings on intrastate gas did not trigger the governmental escalator clause. It also found
that the Kansas Act did not violate the Contract Clause, reasoning that Kansas has a
legitimate interest in addressing and controlling the serious economic dislocations that the
sudden increase in gas prices would cause, and that the Kansas Act reasonably furthered that
interest. The Supreme Court of Kansas, by unanimous vote, affirmed.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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