## Facts

- Kansas Power & Light Co. (KPL), a regulated public utility, entered into two 1975 intrastate contracts to buy natural gas from a Kansas field from Energy Reserves Group, Inc.’s predecessor (ERG later succeeded to the producer’s interest).
- Each contract included (1) a governmental price escalator clause tying the contract price to any higher price “fixed” by a governmental authority, and (2) a biennial price redetermination clause based on averaging prices in three other contracts.
- In 1977, the parties agreed to a higher price under the redetermination clause; the Kansas Corporation Commission approved pass-through to consumers, and KPL paid the new price through 1978.
- The Natural Gas Policy Act of 1978 (NGPA) extended federal price regulation to intrastate gas and established federal ceiling prices, effective December 1, 1978.
- ERG notified KPL in November 1978 that it would raise the contract price to the higher NGPA ceiling under the governmental escalator clause; KPL did not obtain timely pass-through approval and did not pay the higher price.
- Kansas enacted the Kansas Natural Gas Price Protection Act (Kansas Act) in 1979, limiting price increases under older intrastate contracts by restricting use of federal ceiling prices and other contract prices as benchmarks for escalator and redetermination clauses, while allowing certain increases up to specified NGPA ceilings.
- ERG sued seeking a declaration that the Kansas Act was unconstitutional under the Contract Clause and that KPL owed the higher price or the contracts could be terminated; KPL counterclaimed that the contracts remained in force and higher prices were not payable.
- The Kansas trial court and Kansas Supreme Court rejected ERG’s Contract Clause challenge; ERG appealed to the U.S. Supreme Court.

## Issues

1. Whether the Kansas Act, by limiting operation of price escalator and redetermination clauses in existing intrastate gas contracts, impaired contractual obligations in violation of the Contract Clause.
2. Whether any impairment was “substantial” given the regulatory setting and the contracts’ allocation of regulatory risk.
3. If there was impairment, whether the Kansas Act served a significant and legitimate public purpose and employed reasonable means.

## Decision

- The Supreme Court unanimously affirmed, holding the Kansas Act did not violate the Contract Clause.
- The Court applied a three-part framework: (1) substantial impairment, (2) significant and legitimate public purpose, and (3) reasonable and appropriate means.
- The Court found no substantial impairment because the natural gas industry was heavily regulated, further regulation was foreseeable, and the contracts themselves anticipated regulatory approval requirements and contemplated termination options tied to pass-through decisions.
- Even assuming some impairment, the Court held Kansas acted for significant and legitimate public purposes, including consumer protection and reducing disruptive price increases in the intrastate market.
- The Court concluded the Kansas Act’s adjustment of contractual rights was reasonable in light of its limited, targeted controls and its operation within the NGPA’s ceiling-price structure.

## Legal Principles

- Contract Clause review asks: (1) whether the law substantially impairs a contractual relationship; (2) whether the State pursued a significant and legitimate public purpose; and (3) whether the adjustment of rights is reasonable and appropriate to that purpose.
- In a pervasively regulated industry, parties’ expectations are assessed against the likelihood of future regulation; foreseeable regulation reduces the claim of substantial impairment.
- Where contracts allocate regulatory risk (e.g., conditioning price changes on regulatory approval and providing termination options), state regulation that operates within that allocation is less likely to constitute substantial impairment.
- Economic regulation aimed at broad public concerns such as consumer protection and price stability can satisfy the “significant and legitimate public purpose” requirement.
- Courts generally defer to legislative judgments on the reasonableness of economic regulation when the measures are limited and related to the stated public objectives.

## Conclusion

The Court upheld Kansas’s restriction on contract price-escalation mechanisms for older intrastate natural gas contracts, finding no substantial impairment in a heavily regulated market and, alternatively, that the law pursued legitimate public aims through reasonable, appropriately tailored means consistent with the modern Contract Clause analysis.


Energy Reserves Grp., Inc. v. Kan. Power & Light Co., 459 U.S. 400 (1983)