FILED

U.S. COURT OF APPEALS

ELEVENTH CIRCUIT

JUNE 20, 2002

THOMAS K. KAHN

CLERK

*

Honorable John F. Nangle, U.S. District Judge for the Eastern District of

Missouri, sitting by designation.

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

 

No. 01-10216 

 

FERC No. CP99-604-000

BOARD OF WATER, LIGHT and SINKING FUND

COMMISSIONERS OF THE CITY OF DALTON, 

GEORGIA,

Petitioner-Appellant,

versus

FEDERAL ENERGY REGULATORY COMMISSION, 

Respondent-Appellee.

__________________________

Petition for Review of Orders of the 

Federal Energy Regulatory Commission

__________________________

(June 20, 20002)

Before ANDERSON and BLACK, Circuit Judges, and NANGLE*

, District Judge.
2

ANDERSON, Circuit Judge:

Petitioner Board of Water, Light & Sinking Fund Commissioners of the City

of Dalton, Georgia (“Dalton”) challenges two orders by the Federal Energy

Regulatory Commission (“FERC” or the “Commission”) permitting the

construction of a direct delivery connection between Southern Natural Gas

Company’s (“Southern”) natural gas pipeline and one of Dalton’s current

customers, the Beaulieu Plant (“Beaulieu”). The proposed connection will allow

Beaulieu to bypass Dalton. Dalton contends that FERC’s orders are unlawful for

several reasons, including that they violate Southern’s tariff and that they were

impermissible under various sections of the Natural Gas Act (“NGA”). Dalton

also challenges whether the Commission had jurisdiction under the NGA to issue

the orders permitting the direct pipeline connection, arguing that by approving the

bypass connection, the Commission intruded into the state’s regulatory province

over local distribution of natural gas. We conclude that the Commission had

jurisdiction to issue its orders, and that it did not act arbitrarily or capriciously in

deciding that the requested bypass connection should be permitted. Furthermore,

we conclude that the Commission did not abuse its discretion by denying the

request for an evidentiary hearing.
1

Direct delivery connections are also commonly referred to as “bypass

connections” because they permit an end-user to bypass a local distribution

company by utilizing the direct connection to the pipeline. We will use these terms

interchangeably in this opinion.

2

“A tariff is the ‘contract which governs a pipeline’s service to its

customers.’ . . . It contains a listing of the pipeline’s rate schedules and the terms of

its service agreements with customers.” Atlanta Gas Lights Co. v. FERC, 140 F.3d

1392, 1395 n.1 (11th Cir. 1998) (citations and quotations omitted). 

3

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Southern’s Policy Concerning Direct Delivery Connections

The issues involved in this case derive in part from a previous action in

which an end-user of natural gas, Arcadian Corp. (“Arcadian”), sought to require

Southern to grant it a direct delivery connection1

 to Southern’s pipeline. On May

12, 1994, the Commission approved a settlement in Arcadian’s case, pursuant to

which Southern was required to construct a bypass connection for Arcadian. 

Furthermore, the settlement required Southern to file proposed tariff2

 provisions

governing future requests by end-users of natural gas seeking direct delivery

pipeline connections. See Arcadian Corp. v. Southern Natural Gas Co., 67 FERC

¶61,176 (1994). The direct delivery provision eventually approved by FERC

became § 36 of Southern’s tariff. Section 36, in relevant part, states:

DIRECT DELIVERY CONNECTIONS
4

(a) As used herein, the term direct delivery connection shall refer to

interconnection, measurement, and appurtenant facilities necessary to

deliver gas directly to an end-user.

(b) A SHIPPER may request a new direct delivery connection by

submitting to the attention of [Southern’s] Transportation Services

Department, . . . a written request to [Southern] in the format set out in

Appendix A to these General Terms and Conditions. If SHIPPER is

currently receiving natural gas services from the local distributor

servicing the area, or if the direct delivery connection is in the

authorized service area of a local distribution company, SHIPPER

shall provide a copy of its request for a direct delivery connection to

such local distribution company. SHIPPER shall notify [Southern] of

the date SHIPPER has complied with this notice requirement, and

[Southern] shall not make the filing required by Section 157.211(a)(2)

of the Commission’s Regulations until thirty (30) days after the date

SHIPPER notified such local distribution company of its request for a

direct delivery connection.

(c) [Southern] will add a new direct delivery connection if such direct

delivery connection is operationally and economically feasible.

(d) A direct delivery connection is operationally feasible if, with such

connection facilities, [Southern] has the existing pipeline capacity to

perform the requested service through the proposed direct delivery

connection and such service will not impair [Southern’s] ability to

provide service to its existing firm customers.

(e) (1) A direct delivery connection is economically feasible if the

proposed transportation service to be provided through the

direct deliver connection will produce a net revenue gain

(“revenue positive”), or is revenue neutral to [Southern].

 (2) To the extent that the new direct delivery connection serves

an end-user that has historically been served by a firm customer

of [Southern], the proposed transportation service to be

provided through the new direct delivery connection will be

deemed revenue positive or revenue neutral if the costs set out
5

in Section 26(f)(1), (3), and (4), as applicable, are paid or

reimbursed in full by the SHIPPER obtaining the direct delivery

connection. . . . 

(f) The costs referenced in Sections 36(e) (2) and (3), as applicable

are:

(1) All costs, including overheads and taxes, associated with

construction of the required direct delivery connection facilities

and with any modifications to existing facilities required to

maintain service to existing firm customers. . . . 

(g) After the SHIPPER requesting the direct delivery connection

executes an interconnection agreement agreeing to pay or reimburse

[Southern] in full for the costs set out in Section 36(f) (1), (2), (3), and

(4), as applicable, and [Southern] has received all necessary regulatory

authorizations to construct, install, and operate the direct delivery

connection facilities, [Southern] shall commence construction of the

new direct delivery connection in accordance with the terms of such

agreement and regulatory authorizations.

Southern’s Natural Gas Tariff, Seventh Revised, § 36. Therefore, subject to

regulatory authorization by FERC, section 36 requires Southern to provide a direct

delivery connection to an end-user when such a connection is requested by a

shipper, if providing the connection will either result in a revenue gain, or will be

revenue neutral, to the pipeline. Furthermore, section 36 indicates that a

connection will be considered “revenue neutral” if the shipper agrees to pay or

reimburse for all of th costs of the connection to Southern. 

B. The Beaulieu Plant and Dalton
3

When Dalton first began providing gas to the Beaulieu Plant, it was owned

and operated by Coronet Carpets. Beaulieu did not acquire the plant until 1989 or

1990.

4

“Interruptible” service refers to service which may be interrupted by the

seller, in this case Dalton, and for which the end-user does not have to pay monthly

demand charges.

6

Beaulieu is a carpet manufacturer that became a natural gas customer of

Dalton in 1971.3

 Initially, Dalton provided the Beaulieu Plant with “firm” gas

service, meaning that Beaulieu was guaranteed a certain amount of gas and in

exchange had to pay reservation or “demand” charges to Dalton, regardless of

whether it actually used the gas. But in 1987 Beaulieu switched to an

“interruptible” arrangement,4

 under which it purchases gas from third-party

marketers, while retaining the option to purchase gas directly from Dalton when its

supply from third-party marketers is inadequate. 

In 1997, Beaulieu began purchasing its natural gas from Interconn

Resources, Inc. (“Interconn”), a third-party marketer. Under its current

arrangement, Interconn purchases natural gas from out-of-state third parties, and

then transports the gas along Southern’s pipeline. Interconn retains title to the gas

until it reaches Dalton’s city gate station, at which point title is transferred to

Beaulieu. Dalton then delivers the gas to Beaulieu’s plant and charges a

transportation fee to Beaulieu. 
5

Therefore, there is only one difference between the current and proposed

arrangements. Currently, Interconn passes title to the gas to Beaulieu at Dalton’s

city gate station, and Dalton gets a fee for transporting the gas from that point to

the plant. Under the proposed arrangement, title would pass to Beaulieu at the new

direct delivery station, and Dalton would neither transport, nor receive a fee for,

the natural gas going to the Beaulieu Plant.

7

The gas supplied to Beaulieu in this manner accounts for approximately 5%

of the total volume of Dalton’s throughput. According to Dalton, it has always

been able to meet Beaulieu’s natural gas needs.

C. Beaulieu’s Request for a Direct Delivery Connection

On August 3, 1998, Interconn advised Dalton that it had been retained by

Beaulieu to act as its agent in obtaining a direct delivery connection to Southern’s

pipeline. Interconn informed Dalton that it had submitted a request form to

Southern concerning the necessary facilities. Over a year later, on August 18,

1999, Southern filed a notice pursuant to 18 C.F.R. §§ 157.205 and 157.211 with

FERC, proposing to establish the new delivery point for Beaulieu. 

Under the proposal filed with the Commission, Interconn would purchase

natural gas for Beaulieu out of state and then ship the gas along Southern’s

pipeline to the new facility, at which point title would pass to Beaulieu.5 Southern

would operate the meter station and related facilities, but Beaulieu would
6

Pursuant to FERC regulations, when a pipeline makes a request for

authorization pursuant to its blanket certificate of public convenience and necessity

(as Southern did in this case), authorization is automatically granted if no one files

a protest withing 45 days. Authorization is also automatic if all protests are

withdrawn within 30 days after the 45-day notice period. If, however, all protests

are not resolved, then the request is treated as a case-specific authorization request

under NGA § 7(c).

8

reimburse Southern for its expenses in doing so. In addition, Interconn, acting as

Beaulieu’s agent, would construct and operate a four-mile long pipeline connecting

Beaulieu’s plant to the new connection facility. Therefore, Beaulieu, by itself or

through its agent, would construct, own, operate, and pay for the new facilities.

After Southern filed its notice concerning the direct connection facility for

Beaulieu, Dalton filed a protest with the Commission complaining that Southern’s

application violated FERC regulations concerning notice, that the proposed bypass

connection did not comply with the applicable requirements from § 36 of

Southern’s tariff, that the proposed connection was not for the “public convenience

and necessity” as required by § 7 of the NGA, and that the proposed activities

would constitute local distribution over which the Commission had no jurisdiction.

Treating Southern’s proposal as an application for specific NGA § 7(c)

authorization,6

 FERC issued an order on April 3, 2000 denying Dalton’s protest

and request for an evidentiary hearing, and granting Southern authorization to

construct the new connection. In particular, the Commission found that the
9

proposal was consistent with § 36 of Southern’s tariff, that Dalton had not shown

that it or its customers would be unfairly or unreasonably harmed by the bypass,

and that the proposal was justified by FERC’s policy of encouraging competition

between pipelines and local distribution companies (“LDC”).

Dalton moved the Commission for a rehearing based on the same objections

previously asserted, and complained that FERC’s initial order was arbitrary and

capricious, unjust and unreasonable, and unsupported by the record. 

Subsequently, the Commission issued additional data requests to Southern and

Interconn, but, on November 13, 2000, it denied the request for rehearing. The

Commission again found that the proposal, and Southern’s actions, were consistent

with the intent behind § 36 of its tariff, and with FERC’s pro-competitive bypass

policy. The Commission rejected Dalton’s arguments.

Dalton filed a timely petition for review of both the April 3 and November

13 orders. Southern, Interconn and Beaulieu have not intervened or participated in 

the proceedings before this Court. The authorized delivery point on Southern’s

pipeline has not yet been installed.

II. DISCUSSION

A. FERC’s Jurisdiction Over the Direct Delivery Pipeline Connection Sought
10

by Beaulieu

Although Dalton challenges the Commission’s actions with respect to

approving the bypass connection on numerous grounds, only one issue presented

by Dalton requires extended discussion. That is whether the Commission had

jurisdiction, pursuant to the NGA, to approve the direct delivery connection

facilities, or whether it intruded into areas reserved for state regulation by doing so.

 Dalton notes that FERC’s jurisdiction is limited to the interstate transport of

natural gas and to sales of natural gas to distributors for resale, but does not include

regulation of direct sales to retail consumers. Because title to the natural gas

purchased by Beaulieu is to pass from Interconn to Beaulieu at the site of the

proposed new facility, and therefore the sale to Beaulieu arguably occurs at that

point, Dalton contends that the direct delivery connection constitutes a form of

local distribution within the jurisdiction of state regulators, rather than FERC.

Consistent with the other circuit courts that have considered this issue, we

conclude that the Commission was acting well within its jurisdictional mandate in

approving the direct delivery connection for Beaulieu.

“We review the Commission’s determination that construction of the facility

is jurisdictional to ascertain whether the decision has an adequate basis in law.” 

Cascade Natural Gas Corp. v. FERC, 955 F.2d 1412, 1415 (10th Cir. 1992)
11

(citations, quotations and brackets omitted). As Dalton correctly points out,

FERC’s jurisdiction under the NGA is limited, and, in drafting that Act, Congress

intended to leave the states with authority to regulate certain aspects of the natural

gas industry. The jurisdictional provision in the NGA related to FERC’s authority

to regulate natural gas states:

The provisions of this chapter shall apply to the transportation of

natural gas in interstate commerce, to the sale in interstate commerce

of natural gas for resale for ultimate public consumption for domestic,

commercial, industrial, or any other use, and to natural-gas companies

engaged in such transportation or sale, but shall not apply to any other

transportation or sale of natural gas or to the local distribution of

natural gas or to the facilities used for such distribution or to the

production or gathering of natural gas.

15 U.S.C. § 717(b). Therefore, Congress began by granting FERC broad authority

over the interstate transport and sale of natural gas, but then carved out an

exclusion leaving states exclusive regulatory authority over intrastate

transportation and sales, and in particular over the “local distribution” of natural

gas to consumers.

Accordingly, in Panhandle Eastern Pipe Line Co. v. Public Serv. Comm. of

Ind., the Supreme Court stated:

Three things and three only Congress drew within its own regulatory

power, delegated by the Act to its agent, the Federal Power

Commission [FERC’s predecessor agency]. These were: (1) the

transportation of natural gas in interstate commerce; (2) its sale in
12

interstate commerce for resale; and (3) natural gas companies engaged

in such transportation or sale.

332 U.S. 507, 516, 68 S. Ct. 190, 195 (1947). The Court continued by noting that

“[t]he Act was drawn with meticulous regard for the continued exercise of state

power, not to handicap or dilute it in any way.” Id. at 517-18, 68 S. Ct. at 195-96. 

The NGA left the states with authority to regulate “in-state retail sales of natural

gas” and “local distribution.” General Motors Corp. v. Tracy, 519 U.S. 278, 292 &

294, 117 S. Ct. 811, 821-22 (1997). The resulting regulatory system under the

NGA is, therefore, one of “complementary federal regulation of the interstate

market and congressionally approved state regulation of the intrastate gas trade.” 

Id. at 293, 117 S. Ct. at 821.

In 1978, the relationship between federal and state regulation of natural gas

began to undergo some changes, however, as “Congress took a first stop toward

increasing competition in the natural gas market by enacting the Natural Gas

Policy Act.” Id. at 283, 117 S. Ct. at 816. Prior to this shift in policy:

The . . . market structure virtually precluded competition between

LDC’s and other potential suppliers of natural gas for direct sales to

consumers, including large industrial consumers. The simplicity of

this dual system of federal and state regulation began to erode in

1978, however, when Congress first encouraged interstate pipelines to

provide transportation services to end users wishing to ship gas, and

thereby moved toward providing a real choice to those consumers

who were able to buy gas on the open market and were willing to take
13

it free of state-created obligations to the buyer. The upshot of

congressional and regulatory developments over the next 15 years was

increasing opportunity for a consumer in that class to choose between

gas sold by marketers and gas bundled with rights and benefits

mandated by state regulators as sold by LDC’s. But amidst such

changes, two things remained the same throughout the period

involved in this case. Congress did nothing to limit the States’

traditional autonomy to authorize and regulate local gas franchises,

and the local franchised utilities (though no longer guaranteed

monopolies as to all natural gas demand) continued to provide

bundled gas to the vast majority of consumers who had neither the

capacity to buy on the interstate market nor the resilience to forgo the

reliability and protection that state regulation provided.

Id. at 293-94, 117 S. Ct. at 821-22 (footnote omitted). Therefore, the current

regulatory framework still reserves for states the right to regulate local distribution,

while permitting pipelines, pursuant to FERC’s jurisdiction, to engage in the

interstate transport of natural gas purchased by end-users from other sources in

competition with LDCs. 

It is against this backdrop that we are called on to decide whether the

Commission acted within its jurisdiction in approving the direct delivery

connection sought by Beaulieu. Several other courts, and the Commission, have

addressed this question and have consistently found that the Commission does not

unlawfully impinge on states’ regulatory authority by authorizing direct delivery

facilities permitting LDCs to be bypassed. See Cascade Natural Gas Corp. v

FERC, 955 F.2d 1412 (10th Cir. 1992) (holding that FERC had jurisdiction to
14

approve bypass connection because arrangement involved interstate sale and

transport) ;Michigan Natural Gas Co. v. Panhandle Eastern Pipe Line Co., 887

F.2d 1295, 1299-1300 (6th Cir. 1989) Michigan Consolidates Gas Co. v. FERC,

883 F.2d 117, 121 (D.C. Cir. 1989); cf. Midwestern Gas Transmission Co. v.

McCarty, 270 F.3d 536, 538 (7th Cir. 2001) (noting in dicta that bypass facilities

appeared to be within FERC’s jurisdiction given interstate transportation).

The Tenth Circuit in Cascade engaged in an extensive analysis of whether

FERC had jurisdiction to authorize bypass connections to end-users. See Id. 955

F.2d at 1414-21. As discussed above, the NGA reserves for states the authority to

regulate local distribution of natural gas. The Cascade Court stated that “local

distribution,” for purposes of the NGA, is comprised of “local retail sales to

consumers, whether these sales were made by the local distributing companies or

directly by the interstate pipelines.” Id. at 1418 (emphasis deleted). The Court

noted that a review of the legislative history of the jurisdictional provisions of the

NGA confirmed its view that “Congress cleanly adopted the bright line between

sales for resale and direct retail sales drawn by the earlier Commerce Clause

cases.” Id. at 1418-19.

Next, the Cascade Court considered the nature of the bypass transactions

involved in that case to determine whether FERC was intruding into local
7

In a recent decision, the Seventh Circuit also indicated in dicta that it

agreed with these Courts that “the transportation of natural gas bought and

produced out of state to [in-state] residents via [a] pipeline is interstate

transportation” subject to FERC’s jurisdiction. Midwestern Gas Transmission Co.

v. McCarty, 270 F.3d 536, 538 (7th Cir. 2001) (reversing district court’s Younger

abstention in case brought by FERC seeking to enjoin state regulators from acting

in manner that could have interfered with the Commission’s approval of direct

delivery connection). 

15

distribution. The Court noted that the “Commission [had] approved construction

to enable [the pipeline] to transport gas interstate for hire, pursuant to out-of-state

third-party sales.” Id. at 1419. Noting that no sales were taking place by the

pipeline at the location of the bypass connection, the Court concluded that, “[q]uite

simply, the bypass transactions do not entail the realm of local retail sales that

Congress intended to reserve to the states. . . . [because] there is no evidence that

Congress intended to preserve state regulation over the interstate transportation for

hire pursuant to an out-of-state sale.” Id. The Court also rejected the notion that

FERC lacked jurisdiction because the “the bypass involves the ‘functional

equivalent’ of local distribution.” Id. at 1420.

Both the D.C. and the Sixth Circuits7

 have reached the same conclusion – i.e.

on similar facts, holding that the Commission operated within its jurisdiction over

the interstate transportation of gas when it approved bypass arrangements. In

Michigan Consolidated Gas Co. v. FERC, the D.C. Circuit considered whether
16

FERC had authority to approve a bypass arrangement even if the direct connection

would have local effects on LDCs. 883 F.2d 117, 121-22 (D.C. Cir. 1989). The

Court stated that it had “no difficulty in holding that FERC [had] jurisdiction over

the [bypass] arrangement . . . . [because] [t]he arrangement in dispute involve[d]

merely interstate transportation of natural gas, a subject matter clearly within the

Commission’s jurisdiction.” Id. at 121. The Court concluded that “[t]he present

arrangement is the subject of federal regulation pursuant to the NGA because the

arrangement involves the transportation of natural gas in interstate commerce, not a

local sale. . . [and the pipeline’s] role under the arrangement is simply to transport

[the end-user’s] gas from one state to another across several intervening states.” 

Id. The Court further acknowledged that the sale of natural gas to the end-user was

retail rather than wholesale, but found that fact to be of no consequence to the

jurisdictional issue before it because the bypass arrangement approved by FERC

involved only the interstate transport of the gas purchased by the end-user, rather

than any approval of the retail sale. Id. at 121-22. 

The Sixth Circuit later adopted the D.C. Circuit’s approach, and found that

FERC acted within its jurisdiction in approving a bypass connection for an enduser. See Michigan Natural Gas Co. v. Panhandle Eastern Pipe Line Co., 887 F.2d

1295, 1299-1300 (6th Cir. 1989). The Court concluded that the arrangement
17

involved interstate transport by the pipeline, and that if Congress intended to

exclude the “functional equivalent” of local distribution from FERC jurisdiction, it

could have done so explicitly. Id. at 1300. 

In light of this precedent, we now consider whether the Commission had

jurisdiction to approve the bypass for Beaulieu. We agree with the approach taken

by the Sixth, Tenth and D.C. Circuits, and would follow those Courts without

much discussion, except that this case has one factual distinction. In each of those

cases, the end-user purchased the natural gas out of the state, and sought a direct

connection from the pipeline, with the natural gas being transported interstate over

the pipeline to the end-user at the new bypass tap facility. Consequently, it was

clear that none of those cases involved a local sale. In this case, however, it is

Interconn, rather than the end-user Beaulieu, who will purchase the natural gas out

of state and have it transported by the pipeline to the direct delivery connection

facility. The title to the natural gas will pass to Beaulieu at the new facility,

thereby arguably effecting a local sale. 

Despite this factual distinction, we readily conclude that the Commission

had jurisdiction to approve the bypass arrangement at issue in this case. As with

the previous bypass cases, the only part of the arrangement approved by the

Commission is clearly related to the interstate transportation of natural gas. 
8

We express no opinion on whether or how the State of Georgia may

regulate Interconn’s sale to Beaulieu, if in fact that sale takes place in Georgia. We

do note, however, that there appears to be no more of a local sale under the

proposed arrangement than under the current arrangement. In both cases, title

passes from Interconn to Beaulieu in Georgia. The only difference is that title

currently passes at Dalton’s city gates, and Dalton is able to collect a fee for

delivering the gas the rest of the way to the Beaulieu Plant, whereas under the

proposed arrangement, the natural gas would be diverted before it ever reaches

Dalton, thereby depriving Dalton of the opportunity to receive any fee. We have

no occasion to address whether this distinction matters, in that the Commission did

not seek to regulate any local sale, regardless of where it takes place.

18

Consequently, the approved facilities fall squarely within the Commission’s

jurisdiction. While the new facilities arguably facilitate a local retail sale from

Interconn to Beaulieu, and that sale may or may not be subject to state regulation,

the Commission clearly did not pass on that sale.8

 Like the D.C. Circuit in

Michigan Consolidated, we do not believe that the existence of local effects which

may be subject to state regulation deprives the Commission of authority to regulate

the interstate transport of natural gas – an issue squarely within FERC’s

jurisdictional mandate. Michigan Consolidated, 883 F.2d at 121-22. 

 Further support for our determination comes from the Supreme Court’s

recent decision in New York v. FERC, ___ U.S. ___, 122 S. Ct. 1012 (2002),

addressing FERC’s jurisdiction over the transmission and sale of electricity. 

Although the jurisdictional provisions related to electricity are not the same as the

ones governing natural gas, they are similar in that they provide FERC with
19

regulatory authority over “the transmission of electric energy in interstate

commerce” and “the sale of electric energy at wholesale in interstate commerce,”

while leaving to states the regulation of local distribution and local retail sales. 

Id. at 1017. Furthermore, similar to the natural gas industry, the electric energy

industry has undergone significant changes since the time that Congress undertook

to regulate it. The current system permits the “‘functional unbundling’ of

wholesale generation and transmission services,” thereby permitting consumers to

seek power generation, transmission, and ancillary services from multiple sources,

rather than just from one utility company. Id. at 1019-20. Therefore, a consumer

now may purchase electricity from an out-of-state wholesaler, and contract with a

another utility to have the electricity transmitted to its location, while bypassing a

local distributor. 

At issue in New York was whether FERC properly asserted jurisdiction over

the interstate transmission of electricity to such retail consumers. In answering this

question, the Supreme Court concluded that the Commission’s exercise of

jurisdiction over the interstate transmission to an end-user of electricity was proper

in light of the “clear and specific grant of jurisdiction to FERC over interstate

transmissions,” even though it facilitated a retail sale that would otherwise be

outside of FERC’s jurisdiction. Id. at 1025 (quotations omitted). In reaching this
20

conclusion, the Supreme Court stated:

This statutory text thus unambiguously authorizes FERC to assert

jurisdiction over two separate activities – transmitting and selling. It is

true that FERC’s jurisdiction over the sale of power has been

specifically confined to the wholesale market. However, FERC’s

jurisdiction over electricity transmissions contains no such limitation.

Because the FPA authorizes FERC’s jurisdiction over interstate

transmissions, without regard to whether the transmissions are sold to

a reseller or directly to a consumer, FERC’s exercise of this power is

valid.

Id. at 1024. 

Furthermore, the Court stated that the fact that retail sales are generally

subject to state regulation does not deprive FERC of jurisdiction over interstate

transmissions. Id. at 1026. The Court found significant the fact that the

Commission had expressly declined to consider the retail sale portion of the

arrangements, instead limiting its jurisdictional reach to issues related to the

interstate transmission of electricity pursuant to an unbundled, retail sale. Id. at

1026.

We find the New York case instructive as to the Supreme Court’s method of

determining the proper boundaries of FERC’s regulatory authority. This decision

clearly reveals the significance of unambiguous statutory language. See also CBS,

Inc. v. Primetime 24 Joint Venture, 245 F.3d 1217, 1222 (11th Cir. 2001) (noting

that plain meaning of statute controls its interpretation).
21

As was true in New York, the Commission in this case acted within the letter

of its statutory jurisdictional grant when it approved the facilities at issue because

those facilities related to the interstate transport of natural gas. Also similar to

New York, it is of no consequence that the Commission’s exercise of its

jurisdiction facilitates a retail sale, because the Commission did not attempt to

regulate any such sale. Simply put, states’ authority to regulate local retail sales

does not act as a limit on the Commission’s jurisdiction over interstate

transportation, even if that transportation might facilitate retail sales. 

Following the approach of the Sixth Circuit, the Tenth Circuit, the D.C.

Circuit, and the Supreme Court, we conclude that the Commission had jurisdiction,

pursuant to its statutory grant of jurisdiction over the interstate transport of natural

gas, to approve the direct delivery connection facilities at issue in this case.

B. Dalton’s Requests for Discovery

Having found that the Commission had jurisdiction under the NGA to

consider the direct delivery connection sought by Beaulieu, we now turn to

Dalton’s arguments concerning the procedures employed by the Commission in

connection with its consideration of the request for the new facilities. Dalton

maintains that the Commission erred by denying Dalton’s request that it conduct an
9

With respect to the request for discovery, it is not at all clear to us that the

Commission’s regulations provided Dalton with any entitlement to discovery in the

first place in this case. As Southern pointed out to Dalton in its response to

Dalton’s data requests, the Commission’s regulations providing for discovery only

apply to “proceedings set for hearing under Subpart E of this part, and to such

other proceedings as the Commission may order.” 28 C.F.R § 385.401. Because

the Commission did not set the proceedings for a hearing, the discovery provisions

never came into play. Therefore, the issue of the denial of discovery is subsumed

into our review of the denial of an evidentiary hearing.

22

evidentiary hearing and require Southern to provide discovery concerning the

proposed bypass arrangement. It contends that such procedures were necessary in

order for the Commission to determine whether the arrangement might have anticompetitive or other negative effects. Dalton also suggests that such proceedings

were necessary to determine whether there was underlying anti-competitive

agreement between Southern, Beaulieu, Interconn, or any other parties. Dalton

maintains that the lack of an evidentiary hearing, or related discovery, rendered the

proceedings unfair.9

 

In Atlanta Gas Light, we rejected a similar contention by a party who

complained about the Commission’s decision to proceed without an evidentiary

hearing, stating:

The Commission’s regulations pertaining to settlements allow FERC

to decide the merits of contested issues only “if the record contains

substantial evidence upon which to base a reasoned decision or the

Commission determines that there is no genuine issue of material

fact.” 18 C.F.R. § 385.602(h)(1)(i). In considering the arguments of
23

Atlanta Gas in its petition for rehearing of the 1992 Order, the

Commission found that the record, which included an oral argument

as well as the same affidavits that Atlanta Gas submitted for the 1991

and 1992 Orders, was extensive and that there were no material facts

in dispute requiring resolution by a trial-type hearing. We review

FERC’s decision not to hold a hearing for an abuse of discretion, and

find no abuse of discretion.

FERC’s conclusion that live testimony by either affiant at an

evidentiary hearing would not have efficiently furthered the inquiry

was within its broad discretion to structure its own proceedings.

Indeed, even if the affidavits had presented material factual disputes,

FERC need not conduct such a hearing if [the disputes] may be

adequately resolved on the written record. We cannot say that the

Commission abused its discretion in considering Atlanta Gas’s

arguments based on the ample record before it.

Atlanta Gas Light, 140 F.3d at 1400. 

Similarly, in Cascade, the Tenth Circuit rejected a party’s contention that an

evidentiary hearing should have been held by the Commission prior to approving a

bypass arrangement. 955 F.2d at 1425-26. The Court stated that in order for a

hearing to be necessary, a party must: (1)make material allegations of fact, (2)

supported by an adequate proffer of evidence, (3) that are material to the dispute. 

Id. The Court noted that “[a]bsent more specific guidance from the statute,

common sense dictates that the Commission be given flexibility in deciding how it

will use its resources to achieve the purposes of the hearing.” Id. at 1425.

We conclude that the Commission did not abuse its discretion by denying

Dalton’s request for an evidentiary hearing or for related discovery. Most of
24

Dalton’s arguments really are directed at the Commission’s bypass policy, and an

evidentiary hearing would not have been helpful as to those issues. To the extent

that Dalton argues there were anti-competitive or otherwise nefarious intentions

underlying the proposed arrangement, it has proffered no evidence supporting that

allegation. Nor do its unsupported allegations, such as the possible existence of

some unspecified, anti-competitive agreement between Interconn and Beaulieu,

appear plausible. Moreover, it appears to us that much of the information which

Dalton sought through discovery in the FERC proceeding could have been

obtained publicly or through other methods. Therefore, we conclude that the

Commission did not abuse its “broad discretion” by structuring its proceedings in

the way that it did or by denying Dalton the discovery that it sought.

C. FERC’s Interpretation of Southern’s Tariff and Authorization of the Bypass

Conection

Finally, we turn to Dalton’s remaining challenges to the propriety of the

Commission’s decision to grant Southern’s request and authorize the new facilities. 

Dalton challenges this decision on several bases, including that: (1) Beaulieu,

Interconn and Southern did not comply with the technical terms of § 36 of

Southern’s tariff concerning requests for direct delivery connections; (2) Section

36 of the tariff violates §§ 4(a) and (b) of the NGA and is unduly discriminatory or
25

otherwise unlawful; and (3) FERC’s approval of the connection to Beaulieu was

arbitrary and capricious. 

Many of Dalton’s arguments really amount to a challenge to the

Commission’s policy of approving direct delivery connections to pipelines in order

to encourage competition in the natural gas industry. Dalton also protests the

Commission’s conclusion that the approval of the particular connection at issue in

this case would increase competition or otherwise be in the public interest. In

support of these arguments, Dalton put forth evidence that, according to its

calculations, Beaulieu’s natural gas costs would increase as a result of the direct

connection as compared to the costs it currently pays Dalton. Dalton also

maintains that the Commission paid insufficient attention to the effect of the

bypass connection on Dalton and its captive customers who might incur increased

costs as a result of Dalton’s loss of revenue from Beaulieu. Based in part on these

contentions, Dalton challenges the Commission’s finding of public convenience

and necessity and argues that the Commission’s approval of the transport of natural

gas and related facilities was improper under both Southern’s tariff and applicable

provisions of the NGA.

In Atlanta Gas Light Co. v. FERC, 140 F.3d 1392 (11th Cir. 1998), this

Court explained that:
26

The standard of review of FERC decisions is governed by § 19(b) of

the NGA, which makes the Commission's findings of facts

“conclusive” if supported by “substantial evidence.” 15 U.S.C.

§717r(b). This standard is no more than a recitation of the application

of the “arbitrary and capricious” standard to factual findings. The

“arbitrary and capricious” standard hails from the Administrative

Procedure Act, 5 U.S.C. § 706(2)(A), which requires us to uphold the

Commission's actions, findings, and conclusions unless they are

“arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law.”

The scope of our “arbitrary and capricious” review is narrow; we must

not ... substitute [our] judgment for that of the agency, but rather

determine whether there was a rational connection between the facts

found and the choice made, and examine whether the decision was

based on a consideration of the relevant factors and whether there has

been a clear error of judgment.

Id. at 1397 (citations and quotations omitted). 

In addition to limiting our review of FERC’s decisions under the arbitrary

and capricious standard, we have also held that the Commission is entitled to

substantial deference in interpreting tariffs. In Southern Natural Gas Co. v. FERC,

we stated:

The construction of the minimum bill tariff is within the primary

jurisdiction of the Commission. As the Supreme Court has

emphasized, Congress has entrusted the regulation of the natural gas

industry to the informed judgment of the Commission, and not to the

preferences of reviewing courts. A presumption of validity therefore

attaches to each exercise of the Commission’s expertise. The

Commission’s interpretation of the tariff need not be the only

reasonable one or even the one that we would necessarily reach if we

were to decide the issue initially; if the Commission’s interpretation of

the tariff is reasonable, it must be upheld. 
10Dalton argues that the Commission failed adequately to take account of the

fact that costs will be shifted to other Dalton customers as a result of the loss of

revenue from Beaulieu. After reviewing the record, we cannot conclude that the

Commission acted arbitrarily or capriciously by dismissing Dalton’s arguments as

overly speculative, and as subject to the ability of either Dalton or other state

agencies to take steps to limit any negative impact on captive consumers.

27

780 F.2d 1552, 1558 (11th Cir. 1986) (citations and quotations omitted). 

Moreover, we have held that when reviewing the Commission’s application and

interpretation of the provision’s of a tariff, the Court will not “elevate form over

substance,” but instead will allow the Commission some leeway in applying tariff

provisions in such a way as to effectuate their intent. Atlanta Gas Light, 140 F.3d

at 1400-01. 

Based on our review of the record, we must reject all of Dalton’s challenges

to the Commission’s interpretation of Southern’s tariff and to the propriety of the

requested direct delivery connection. We cannot conclude that the decision of the

Commission was arbitrary and capricious.10 Furthermore, the Commission’s

interpretation of Southern’s tariff was reasonable, and its decisions complied with

that tariff and with the applicable provisions of the NGA. In particular, we believe

that FERC’s policy of encouraging competition in the natural gas industry by

approving direct delivery connections, and its practice of deferring to end-users

determinations of what arrangements are in their economic best interest, are
28

reasonable. See Midcoast Interstate Transmission, Inc. v. FERC, 198 F.3d 960,

968 (D. C. Cir. 2000) (noting that “FERC was entitled to rely on . . . general

economic theory”). Therefore, the Commission’s decisions are due to be affirmed.

III. CONCLUSION

For these reasons, we conclude that FERC had jurisdiction pursuant to the

NGA to consider Southern’s request to establish a direct delivery pipeline

connection for Beaulieu because the proposed arrangement involved the interstate

transport of natural gas. We also conclude that the Commission did not abuse its

discretion in structuring its proceedings as it did, and that the Commission’s

decision to approve the new facilities was supported by substantial evidence and

was not otherwise arbitrary or capricious. Therefore, we affirm the Commission’s

decisions in all respects.

AFFIRMED.