The Kansas Power & Light Company (KPL) entered long-term contracts in 1977 governing its purchase of natural gas from the Energy Reserves Group (ERG), a Kansas-based oil company. The contracts contained "price escalator" clauses which provided for gas prices to rise to the levels set by governmental authorities. In 1978, the federal government established a new system for regulating natural gas prices under the Natural Gas Policy Act. The Act set maximum lawful prices that could be charged for different types of natural gas and applied these price levels to intrastate gas markets. The Act allowed states to set maximum price levels below federal levels, which Kansas did under the Kansas Natural Gas Price Protection Act (Kansas Act). When ERG tried to raise its prices to the higher federal levels using the "price escalator" clause, KPL insisted that it was only legally obligated to buy gas at the lower prices set by the Kansas Act. ERG claimed that KPL violated the contract by refusing to pay federal prices. In response, KPL argued that the Kansas Act clearly prohibited the use of federal price levels to trigger "price escalator" clauses. After a state trial court ruled in favor of KPL, ERG claimed that the Kansas Act violated the Contract Clause by preventing federal price changes from affecting state contracts. The Supreme Court of Kansas held that the Kansas Act did not violate the Contract Clause since it was a legitimate effort by the state of Kansas to protect its economy from rapid price changes.
Did the Kansas Natural Gas Price Protection Act violate the Contract Clause by preventing federal price controls on natural gas from affecting price adjustments made under intrastate contracts?
No. Justice Harry Blackmun delivered the opinion for a unanimous court. The Court determined that ERG did not have its contractual rights "substantially impaired" and found that the state of Kansas had "significant and legitimate public purpose[s]" for passing the Kansas Act. The contract between ERG and KPL facilitated changes in prices according to governmental price controls, and the new state price controls adhered to federal guidelines. In passing the Kansas Act, the state "exercised its police powers to protect consumers from the escalation of natural gas prices." The Natural Gas Policy Act set maximum price levels for natural gas but explicitly permitted states to lower these levels. Therefore "price escalator" clauses included in intrastate contracts would adhere to lawfully enacted state price levels.
Decisions
Decision: 9 votes for Kansas Power & Light, 0 vote(s) against Legal provision: Article 1, Section 10, Paragraph 1: Contract Clause
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Full Opinion by Justice Harry A. Blackmun
