Energy Reserves Group, Inc. v. Kansas Power & Light Co.

459 U.S. 400 (1983)

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Nature of the Case

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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 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.