Energy Reserves Group Inc. v. Kansas Power and Light Co.
459 U.S. 400 (1983)

  • KPL was buying natural gas from ERG. The contract stipulated the price, but had a clause stating 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.”
    • At the time, the Federal government had price controls that set a maximum price you could charge for natural gas.
  • Kansas enacted a law that said the price in existing contracts could not be increased even if the Federal government raised the price ceiling.
  • The Federal government raised the ceiling, and ERG raised their price. KPL sued.
    • KPL argued that the price increase violated the Kansas State law.
    • ERG argued that the Kansas law was a violation of their freedom of contract, and therefore a violation of the Contracts Clause of the Constitution.
      • Article I §10 says, “No State shall pass any law impairing the obligation of contracts.”
  • The US Supreme Court upheld the Kansas law.
    • The US Supreme Court found that ERG’s rights were not “substantially impaired” because everyone was aware of the fact that the contract was subject to a wide range of regulations.
    • The Court went on to suggest that if there is a “substantial impairment,” then the law would still be Constitutional if “the state, in justification has a significant and legitimate public purpose,” and “whether the adjustment of rights and responsibilities of contracting parties is based upon reasonable conditions and is of a character appropriate to the public purpose justifying the legislation’s adoption.”
      • In this case the Court found that any “substantial impairment” that might exist is outweighed by an overriding interest in consumer protection.
  • So basically, the holding in this case is that the State can interfere with a contract, as long as there is no “substantial impairment” to the parties, or (if there is substantial impairment), if the State has a legitimate, overriding reason and the law is reasonable and appropriate.
    • That’s very similar to the Rational Basis Test.