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decided: January 24, 1983.



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.

Author: Blackmun

[ 459 U.S. Page 403]

 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.*fn1 The second is a price redetermination

[ 459 U.S. Page 404]

     clause; this gives ERG the option to have the contract price redetermined no more than once every two years.*fn2 The new price is then set by averaging the prices being 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,

[ 459 U.S. Page 405]

     or no fewer than 60 days before a price redetermination increase is to become effective. Ibid. If the Commission refuses to permit the pass-through and KPL elects not to pay the increase, ERG has the option to terminate the agreement on 30 days' written notice.

Each contract states that 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. Id., at 70a. Each contract also provides: "Neither party shall be held in default for failure to perform hereunder if such failure is due to compliance with," ibid., any "relevant present and future state and federal laws." Id., at 69a.

In 1977, ERG invoked the price redetermination clause, and the parties agreed on a price of $1.77 per Mcf, effective November 27 of that year. The Commission approved the pass-through of this increase to consumers. KPL paid the new price through 1978.*fn3


On December 1, 1978, the Natural Gas Policy Act of 1978 (Act), Pub. L. 95-621, 92 Stat. 3350, 15 U. S. C. § 3301 et seq. (1976 ed., Supp. V), designed in principal part to encourage increased natural gas production, became effective. The Act replaced the federal price controls that had been established under the Natural Gas Act, ch. 556, 52 Stat. 821, with price ceilings that rise monthly based on "an inflation adjustment factor" and other considerations. Different ceilings are set for different types of gas. Section 102 of the Act, 15 U. S. C. § 3312 (1976 ed., Supp. V), sets a gradually increasing ceiling price for newly discovered or newly produced natural gas. The December 1978 ceiling price under § 102 was

[ 459 U.S. Page 406]

     $2.078 per million British thermal units. Section 104 sets ceiling prices for "old" interstate gas, that is, gas from already discovered and producing wells. Section 109 sets another ceiling price for categories of natural gas not covered by the other sections of the Act. As of December 1978, the § 109 ceiling price was $1.63 per million Btu's.

In another departure from the 1938 Natural Gas Act, the new Act extended federal price regulation to the intrastate gas market. See S. Conf. Rep. No. 95-1126, pp. 67-68 (1978); H. R. Conf. Rep. No. 95-1752, pp. 67-68 (1978). Section 105 of the Act establishes the rule for applying price ceilings to intrastate gas, described as gas not committed to interstate commerce on November 8, 1978.*fn4 It provides, in its subsection (b)(1), that the maximum lawful price of such gas "shall be the lower of . . . the price under the terms of the existing contract, to which such natural gas was subject on [November 9, 1978], . . . or . . . the maximum lawful price . . . computed for such month under section 102 (relating to new natural gas)."*fn5 The parties agree that § 105(b)(1) governs these contracts.

The Act, by § 602(a), also permits a State "to establish or enforce any maximum lawful price for the first sale of natural

[ 459 U.S. Page 407]

     gas produced in such State which does not exceed the applicable maximum lawful price, if any, under title I of this Act."


In direct response to the Act, the Kansas Legislature promptly imposed price controls on the intrastate gas market. In May 1979, the Kansas Natural Gas Price Protection Act (Kansas Act), 1979 Kan. Sess. Laws, ch. 171, codified as Kan. Stat. Ann. §§ 55-1401 to 55-1415 (Supp. 1982), was enacted.*fn6 The Kansas Act applies only to natural gas contracts executed before April 20, 1977, § 55-1403, and controls natural gas prices until December 31, 1984, § 55-1411. Section 55-1404 prohibits consideration either of ceiling prices set by federal authorities or of prices ...

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