CONSTITUTIONAL COURT OF SOUTH AFRICA
Case CCT 131/18
In the matter between:
NATIONAL ENERGY REGULATOR OF SOUTH AFRICA First Applicant
SASOL GAS (PTY) LIMITED Second Applicant
and
PG GROUP (PTY) LIMITED First Respondent
SOUTH AFRICAN BREWERIES (PTY) LIMITED Second Respondent
CONSOL GLASS (PTY) LIMITED Third Respondent
NAMPAK LIMITED Fourth Respondent
MONDI LIMITED Fifth Respondent
DISTRIBUTION AND WAREHOUSING
NETWORK LIMITED Sixth Respondent
ILLOVO SUGAR SOUTH AFRICA LIMITED Seventh Respondent
Neutral citation: National Energy Regulator of South Africa and Another v PG
Group (Pty) Limited and Others 2019 ZACC 28
Coram: Cameron J, Froneman J, Jafta J, Khampepe J, Ledwaba AJ,
Madlanga J, Mhlantla J, Nicholls AJ and Theron J
Judgments: Khampepe J (unanimous): [1] to [93]
Jafta J (concurring): [94] to [128]
Heard on: 26 February 2019
Decided on: 15 July 2019
Summary: Gas Act 48 of 2001 — Monopoly — maximum pricing decision
— tariff decision — pricing regulation
Promotion of Administrative Justice Act 3 of 2000 —
administrative decision — rationality
ORDER
On appeal from the Supreme Court of Appeal (hearing an appeal from the High Court
of South Africa, Gauteng Division, Pretoria):
1. The application for leave to appeal is granted.
2. The appeal is upheld in part, insofar as it relates to the Supreme Court of
Appeal’s setting aside of the decision of the first applicant of 26 March
2013 to approve the transmission tariffs for the period of 26 March 2014 to
30 June 2015.
3. The remainder of the appeal is dismissed.
4. Paragraph 2(a) of the order of the Supreme Court of Appeal is set aside and
substituted with the following:
“(a) The first applican t’s decision of 26 March 2013 to approve the
application by the second applicant for maximum gas prices and
for a trading margin for the period 26 March 2014 to 30 June 2017
is reviewed and set aside.”
5. The applicants must pay the respondents’ costs in this Court, including the
costs of two counsel.
1
JUDGMENT
KHAMPEPE J (Cameron J, Froneman J, Jafta J, Ledwaba AJ, Madlanga J,
Mhlantla J, Nicholls AJ and Theron J concurring):
Introduction
[1] In terms of the Gas Act ,1 the statutory functions of the first applicant, the
National Energy Regulator of South Africa (NERSA), include regulating gas prices in
the prescribed manner; monitoring and approving, and if necessary regulating tariffs
for the transmission of gas; and p romoting competition in the gas industry. 2 Where
NERSA has determined that there is inadequate competition in the gas market, it is
mandated by the Gas Act to approve maximum gas prices that a regulated entity may
charge through the imposition of a condition in the licence of that entity.3
[2] The first and second applicants, NERSA and Sasol Gas (Pty) Limited (Sasol),
seek leave to appeal against a judgment of the Supreme Court of Appeal 4 reversing a
decision of the High Court of South Africa, Gauteng Division, Pretoria ,5 (High Court)
and reviewing and setting aside the decisions of NERSA to approve Sasol’s maximum
gas price and transmission tariff applications on the dual base s of irratio nality and
unreasonableness.
1 48 of 2001 (Gas Act).
2 Sections 2(h) and 4(g)-(h) of the Gas Act.
3 Section 21(p) of the Gas Act.
4 PG Group (Pty) Ltd v National Energy Regulator of South Africa [2018] ZASCA 56; 2018 (5) SA 150 (SCA)
(Supreme Court of Appeal judgment).
5 PG Group (Pty) Ltd v National Energy Regulator of South Africa [2016] ZAGPPHC 1119
(High Court judgment).
KHAMPEPE J
2
[3] The respondents are all large-scale consumers of piped gas who were aggrieved
by NERSA’s decision to approve Sasol’s applications as the approval resulted in a
substantial increase in the prices they had been paying.
Legislative and factual background
[4] In the late 1990s and early 2000s, Sasol and a Mozambican partner developed
natural gas fields in Mozambique and built a pipeline to pump gas to South Africa. In
consideration for this investment, the South African government and Sasol concluded
the “Mozambican Gas Pipeline Agreement ” (Pipeline Agreement) on
26 September 2001. The Pipeline Agreement incorporated a “Regulation Agreement”
that allowed Sasol to determine its gas prices with reference to “market value pricing”.
Under market value pricing , the price for each customer is generally set just below
their individual and particular cost of switching to an alternative fuel . This was done
in order to compensate Sa sol for its investment in the Mozambican gas field
development.
[5] The Pipeline Agreement was conditional upon the inclusion of a provision in
the Gas Act (which at the relevant time was in the process of being drafted) that made
the agreement binding on NER SA for ten years. The market value pricing regime
came to an end on 25 March 2014, following which Sasol’s gas prices were subject to
regulation by NERSA.
[6] The Gas Act came into force on 1 November 2005 and NERSA is the gas
regulator referred to in the Gas Act .6 In terms of section 4(g) of the Gas Act, NERSA
is required to regulate maximum prices, in terms of section 21(1)(p) , in “the
prescribed manner”. Section 21 sets out the framework and requirements that NERSA
6 Section 4(1)(a) of the National Energy Regulator Act 40 of 2004 provides that NERSA is the g as regulator
referred to in the Gas Act.
KHAMPEPE J
3
must consider when imposing licence conditions on a regulated entity . More
specifically, where NERSA has determined that there is inadequate competition in the
gas market, section 21(1)(p) requires NERSA to determine, as a condition of a licence
for a regulated entity (in this case, Sasol), “maximum prices” which it must approve.
[7] The prescribed manner referenced in section 4(g) of the Gas Act is described in
regulation 4(3) – (4) of the Regulations.7 Regulation 4(3) provides that:
“[NERSA] must, w hen approving the maximum prices in accordance with
Section 21(1) (p) of the Act—
(a) be objective i.e. based on a systematic methodology applicable on a
consistent and comparable basis;
(b) be fair;
(c) be non-discriminatory;
(d) be transparent;
(e) be predictable; and
(f) include efficiency incentives.”
[8] Regulation 4(4) provides:
“Maximum prices referred to in subregulation (3) must enable the licensee to—
recover all efficient and prudently incurred investment and operation costs; and
make a profit commensurate with its risk.”
[9] Section 4(h) of the Gas Act also provides that NERSA’s function is to “monitor
and approve, and if necessary regulate, transmission and storage tariffs and take
appropriate action when necessary to ensure that they are applied in a
non-discriminatory manner as contemplated in section 22”. Section 22 goes on to
elaborate on the requirement of non-discrimination.
7 Piped Gas Regulations GN R321 GG 29792, 20 April 2007 (Regulations).
KHAMPEPE J
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[10] During the course of carrying out its statutory functions, NERSA determined
that there was inadequate competition in the piped -gas market. Prompted by
NERSA’s determination, on 24 December 2012, Sasol made two applications, the one
for determination of its maximum gas prices (Maximum Price Application) and the
other for the determination of its transmission tariffs (Tariff Application).
[11] Applications for approval of transmission tariffs are determined in acc ordance
with NERSA’s Guidelines for Monitoring and Approving Piped -Gas Transmission
and Storage Tariffs in South Africa of 1 May 2009 (Tariff Guidelines). The Tariff
Guidelines provide for the use of various methodologies by an applicant for tariff
calculation. In its Tariff Application, Sasol opted for the “Rate of Return”
methodology. It adjusts the overall tariff level according to a company’s efficient
level of accounting costs and costs of capital. It is based on the calculation of revenue
a company will be allowed to earn to cover its efficient operational expenses and to
provide a return on its efficient level of investment in capital and assets.
[12] After public hearings and further submissions, NERSA approved Sasol’s Tariff
Application on 26 March 2013. NERSA published reasons for its decision on
24 April 2013 (Tariff Decision).
[13] NERSA’s decision with regard to the Maximum Price Application was based
on three interrelated steps, some of which pre-dated Sasol’s application.
[14] The first step was to determine the methodology by which the maximum prices
would be set under section 21(1)(p) of the Gas Act (Maximum Pricing Methodology).
This process involved NERSA publishing a first and second draft methodology for
public comment and, finally, publishing the approved methodology on 28 October
2011. NERSA published its reasons for adopting the methodology on 24 November
2011.
KHAMPEPE J
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[15] The Maximum Pricing Methodology stated that the max imum prices proposed
by an applicant or licensee were to be reviewed on the basis of a formula using
indicator prices in a basket of coal, diesel, electricity, heavy fuel oil (HFO) and
liquefied petroleum gas (LPG), with their respective weightings being a pportioned at
37% for coal, 24% for diesel, 37% for electricity and 1% for both HFO and LPG.
Allowance was also made for discounts in respect of different categories of customers.
After stating that it recognised the basket of alternatives method to be “ appropriate
under the prevailing circumstances”, the Maximum Pricing Methodology states:
“However, where the licensee deems the price determined by this methodology to be
materially lower or higher than its preferred and appropriate gas price in that it
impacts on the ability to compete and/or recover efficiently and prudently incurred
costs and make a profit commensurate with risk, then the Energy Regulator will allow
such licensee to opt for the use of the ‘pass -through’ approach to ensure that the
licensee fully recovers all its efficiently and prudently incurred costs and makes a
profit commensurate with its risk as provided for in the legislation. This will of
course apply to instances when the preferred and appropriate price is either higher or
lower, than the one determined by using the approach explained in Sections 3.1 to
3.4. The approach will then become the systematic methodology to be consistently
applied throughout the licence period for such a licensee electing to use this
‘pass-through’ approach.”
[16] The pass-through approach requires a n applicant to justify their proposed price
for gas on the basis of a cost-based price build -up, including at least the cost of
procured or produced gas, and any transportation or regasification costs. The
transmission and distribution tariffs and the trading margin, determined under this
methodology, would be added to the maximum energy price . The pass -through
approach is a simple “cost plus percentage” method of determining a price. Its use is
commensurate with regulation 4(4), which provides that maximum prices must enable
the licensee to recover all efficient and prudently incurred investment and operational
costs; and make a profit commensurate with its risk.
KHAMPEPE J
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[17] NERSA’s second step was to determine whether t here was inadequate
competition in the gas market within the meaning of section 21(1)(p). NERSA first
published a draft inadequate competition determination in September 2011, followed
by a final inadequate competition determination on 29 February 2012.8
[18] The third step was to determine Sasol’s Maximum Price Application. In the
application, Sasol elected to use the basket of alternatives method and not the pass -
through approach for the determination of its application. After initial public
comments, NERSA published a draft of its determination of Sasol’s application on 11
February 2013. After further public hearings and submissions, NERSA approved the
Maximum Price Application on 26 March 2013. On 24 April 2013, NERSA
published reasons for its approval of the Maximum Price Application (Maximum
Price Decision). NERSA’s approval was on the following bases:
(i) The maximum gas price is R117.69. This price is subjected to six
categories of volume discount ranging from R73.56 to R108.86. The
prices were subject to escalation from 26 March 2014.
(ii) Sasol may add a “trading margin” of R8.21 to the above prices for the
first three months, and R10.40 thereafter.
8 In its reasons for the decision, NERSA stated that for seven years Sasol had sustained the price of gas
consistently above a competitive level or marginal cost. It described the effect of the Regulation A greement as
follows:
“(i) At present there is one licensee that provides transmission and distribution of
piped-gas in the South African piped -gas market, namely Sasol Gas, who is
effectively the sole supplier of gas and importer of natural gas into the South African
market. This licensee is vertically integrated in that it owns and operates the pipeline
network both at transmission and distribution level. It also owns the focal product
which is the subject of the competition assessment being undertak en by the Energy
Regulator. Furthermore, Sasol Gas is also a dominant player in the trading of gas at
wholesale and retail levels. Currently there are four traders of natural gas in South
Africa in addition to Sasol Gas most of whom resell gas purchased from Sasol Gas.
It is important to point out that these independent traders do not own the
infrastructure or network critical in transporting or distributing gas to customers
around the country in competition with Sasol Gas.
(ii) The conditions in South African piped -gas market manifest those of a monopolist
who has an influence in the market in terms of gas supply and prices. Notably, the
price of natural gas and synthetic gas is referenced to t he cost of an alternative energy
source available to an individual customer.”
KHAMPEPE J
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(iii) The prices were subject to an overall “revenue neutrality” restriction for
one year in order to ensure that Sasol did not earn more revenue overall
in the first year of the new dispensation than it had in the final year of
the old dispensation.
Litigation History
High Court
[19] Aggrieved by the substantial price increase which followed NERSA’s
decisions, the respondents applied to the High Court to review and set aside the
Maximum Price Decision and the Tariff Decision on the basis that NERSA’s
determination had been irrational and unreasonable. The y also sought an order
reviewing and setting aside the Maximu m Pricing Methodology, or alternatively, an
order declaring the methodology to be invalid for the purposes of NERSA’s
consideration of Sasol’s Maximum Price Application. The review was brought in
terms section 6 of the Promotion of Administrative Justice Act9 (PAJA), or
alternatively, the principle of legality.
[20] The High Court held that the Maximum Price Decision falls within the ambit of
PAJA, which requires that proceedings for judicial review must be brought “without
unreasonable delay” and not later th an 180 days after the person concerned became
aware of the administrative action. 10 The High Court held that NERSA had a
statutory duty to lay down the Maximum Pricing Methodology, which was done
nearly two years before the review application was brought. It was therefore the
Maximum Pricing Methodology that should have been challenged by the respondents.
Applying the test in OUTA, the High Court concluded that the respondents’ delay in
bringing the review application was unreasonable and that it was only empowered to
entertain the review if the interests of justice dictate an extension in terms of section 9
9 3 of 2000.
10 Section 7(1) of PAJA.
KHAMPEPE J
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of PAJA.11 As the respondents had set out no facts which prevented them from taking
the Maximum Pricing Methodology on review timeously and were big c orporations
with access to quality legal advice, the High Court declined to entertain the review
because of the unreasonable delay. The High Court therefore did not decide the
merits of the review and dismissed the application with costs.
Supreme Court of Appeal
[21] In the Supreme Court of Appeal , the applicants raised a further objection to the
Court deciding the merits of the review, based on a contention that the matter was now
of academic interest only (as the period for which the decision was made lapse d in
June 2017). The Supreme Court of Appeal found that there was still a live issue
between the parties as the respondents sought an order that , should the approval of
Sasol’s prices be set aside, any maximum prices for that period “shall apply
retrospectively with effect from 26 March 2014 until the date of termination of such
approval”. The Supreme Court of Appeal also found that there was considerable
public interest in resolving whether the Maximum Pricing Methodology NERSA
adopted, and which it presumably intends to utilise again in the future, is valid.
[22] On the issue of undue delay, the Supreme Court of Appeal held that whilst
regulation 4(3)(a) requires NERSA to “be objective i .e. based on a systematic
methodology applicable on a consistent and comparable basis” when determining gas
prices, it does not require it to make “a freestanding upfront determination of the
methodology” before doing so. Accordingly, the Supreme Court of Ap peal held that
the determination of the Maximum Pricing Methodology and the determination of the
Maximum Price Application form part of the same composite process under
11 Opposition to Urban Tolling Alliance v South African National Roads Agency L imited [2013] ZASCA 148;
2013 JDR 2297 (SCA); [2013] 4 All SA 639 (SCA) (OUTA) at para 26 – which effectively states that before the
effluxion of 180 days, the first enquiry in applying section 7(1) of PAJA is still whether the delay (if any) was
unreasonable, but after the 180 day period, the issue of unreasonablene ss is pre-determined by the legislature (it
is unreasonable per se) and can only be entertained if the interests of justice dictate that an extension be granted
in terms of section 9.
KHAMPEPE J
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section 21(1)(p) of the Gas Act and that, whilst NERSA may choose to carry out that
process in a step-by-step fashion, it was not obliged to do so.
[23] Relying on New Clicks ,12 the Court held that the determination of the
maximum gas price was made by way of a staged process which only became binding
on its completion when NERSA made its decisio n on Sasol’s Maximum Price
Application. Therefore, the High Court erred in not recognising that the
administrative action that fell to be reviewed was NERSA’s decision to approve
Sasol’s Maximum Price and Tariff Applications (which review was brought within the
requisite 180 day period).
[24] On the merits of the review, the Court held that the rationality and
reasonableness of the decision had to be decided on certain elementary and undisputed
principles of economics, the common cause facts , and the reasons NERSA set out
when it gave its decision in October 2011, and that any further reasons were
irrelevant.13 The Supreme Court of Appeal held, looking at the reasons for NERSA’s
decision,14 that the evils it had set out to address were gas pric es higher than would
have been charged in a competitive market and abuse by Sasol of its market power.
Instead NERSA, irrationally, did the opposite. It proceeded to determine a
methodology referencing more expensive alternative sources of fuel, and whic h had
the effect of permitting an increase rather than reducing Sasol’s monopolistic prices
(which NERSA had already concluded were too high).
[25] The Supreme Court of Appeal held that, b y employing the cost of a basket of
alternatives as a proxy for a maximu m price of gas, NERSA had set a benchmark
12 Minister of Health v New Clicks South Africa (Pty) Ltd (Treatment Acti on Campaign as amici curiae) [2005]
ZACC 14; 2006 (2) SA 311 (CC); 2006 (1) BCLR (1) (CC) (New Clicks) at paras 136-8.
13 Relying on National Lotteries Board v South African Education and Environment Project [2011] ZASCA
154; 2012 (4) SA 504 (SCA) at paras 24-8. This was in light of the various expert reports filed which the
Supreme Court of Appeal said played no part in NERSA’s decision making and were an ex post facto attempt to
either justify or condemn it.
14 See Supreme Court of Appeal judgment above n 4 at paras 43-4.
KHAMPEPE J
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which established a price that a monopolist would have charged. This, the Court said,
was hardly a reasonable or rational decision taken to mimic a competitive price.
The Court also held that as the Tariff Decisi on was inextricably linked to the
Maximum Price Decision it should be set aside. The appeal therefore succeeded.
[26] In order to address and correct the consequences of the invalidity, the Supreme
Court of Appeal ordered that any maximum gas prices subsequen tly approved by
NERSA for Sasol would apply retrospectively with effect from 26 March 2014 until
the date of termination of the approval (this effectively required NERSA to determine
a new maximum price to be applied retrospectively).
Jurisdiction and leave to appeal
[27] This matter concerns the review of public power in terms of PAJA, which
directly impacts on the right to just administrative action in terms of section 33 of the
Constitution.15 It is therefore a constitutional issue that engages this Court’ s
jurisdiction. It is also in the interests of justice that leave to appeal should be granted
as there are reasonable prospects of success.
Issues for determination
[28] The following issues arise for determination:
(a) Can the Maximum Price Decision be reviewed independently, without
reviewing the Maximum Pricing Methodology?
(b) If the answer to the first question is positive, w as NERSA’s Maximum
Price Decision irrational or unreasonable?
(c) Is the lawfulness of the Tariff D ecision dependent on the lawfulness of
NERSA’s Maximum Price Decision?
Each of these issues is addressed below.
15 Bato Star Fishing (Pty) Limited v Minister of Environmental Affairs and Tourism [2004] ZACC 15; 2004 (4)
SA 490 (CC); 2004 (7) BCLR 687 (CC) at para 25.
KHAMPEPE J
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(a) Review of the Maximum Pricing Methodology
[29] The applicants submit that the High Court was correct in dismissing the review
on the basis of unrea sonable delay. They contend that the Maximum Pricing
Methodology constitutes reviewable administrative action and that the Supreme Court
of Appeal erred in finding that it did not. Sasol submits that i t is clear that the
Maximum Pricing Methodology contains a set of rules that binds NERSA and all
persons applying for approval of maximum prices un less it is set aside by a c ourt.
This, Sasol argues, means that the respondents need ed to set aside the
Maximum Pricing Methodology if they wish ed to impugn the Maximum Price
Decision. If the methodology is valid (which must be assumed until set aside by a
court), then NERSA was bound to follow it when making the Maximum Price
Decision.
[30] The respondents submit that the Supreme Court of Appeal was c orrect in
finding that the High Court erred in upholding Sasol’s special plea of undue delay.
The respondents argue that, while regulation 4(3) required NERSA to be objective (by
applying a systematic methodology on a consistent and comparable basis), it did not
oblige NERSA to make a freestanding upfront determination of its methodology
before doing so. NERSA gave Sasol the choice between the basket of alternatives and
the pass -through approach es, meaning that until Sasol’s choice was made, the
Maximum P ricing Methodology was, in its own terms , hypothetical and subject to
change. The Maximum Pricing Methodology was also not binding on NERSA in its
determination of Sasol’s gas prices – it was merely an interim step towards NERSA’s
determination of Sasol’s maximum prices.
[31] If the applicants’ arguments were accepted, that would imply that every
customer of Sasol would have been obliged to take NERSA’s methodology on review
within 180 days of its publication to avoid being bound by it forever, 16 even when the
Maximum Pricing Methodology might not have applied to a specific entity at that
16 In terms of section 7 of PAJA.
KHAMPEPE J
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stage. It may well be that a methodology, like the one in this case, could constitute
administrative action reviewable in terms of PAJA . However, f or the reasons that
follow, I find that i t is not necessary for this Court to determine whether or not the
Maximum Pricing Methodology constitutes administrative action in terms of PAJA.
[32] The Maximum Price Decision is a separate and independent administrative
action that is reviewable in and of itself . There is nothing that bars the respondents
from electing to review the Maximum Price Decision and not the Maximum Pric ing
Methodology, as these are two separate, independent decisions. It may seem desirable
for this Court to treat the Maximum Pricing Methodology and the Maximum Price
Decision holistically as one continuous process. However, this case does not provide
the facts to support and endorse this treatment.
[33] The Maximum Pricing Methodolog y is not law, but rather a guideline made in
accordance with the empowe ring legislation. NERSA thus ha s discretion not to
rigidly apply the methodology if its application would lead to irrational or otherwise
unlawful results. In Britten, Innes CJ noted that although policies and general
principles are sometimes inevitable, a decision -maker must remain alive to the
existence of circumstances in a case that would justify a departure from the policy or
precedent.17
[34] This principle in Britten was reaffirmed in Kemp N.O., where the Supreme
Court of Appeal held:
“[G]enerally there can be no objection to an official exercising a discretion in
accordance with an existing policy if he or she is independently satisfied that the
policy is appropriate to the circums tances of the particular case. What is required is
only that he or she does not elevate principles or policies into rules that are
considered to be binding with the result that no discretion is exercised at all.”18
17 Britten v Pope 1916 AD 150 at 158-60.
18 Kemp N.O. v Van Wyk [2005] ZASCA 77; [2008] 1 All SA 17 (SCA) at para 1.
KHAMPEPE J
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[35] Accordingly, NERSA was not precluded from exercising its discretion and
departing from the Maximum Pricing Methodology. This is evinced by the fact that
NERSA did not determine Sasol’s gas prices in accordance with its own methodology
because at the eleve nth hour it added the overriding requirement of
“revenue neutrality” to achieve a more equitable result. 19 This further illustrates that
there was a level of independence between the Maximum Price Decision and the
Maximum Pricing Methodology as NERSA still had to make an independent decision,
exercising its discretion, about the former.
[36] In any event, e ven if the Maximum Pricing Methodology did constitute a
reviewable decision in terms of PAJA, it is not the decision that is being reviewe d and
it does not preclude the Maximum Price Decision, which is an administrative action in
terms of PAJA, from being reviewed. The implementation of the Maximum Pricing
Methodology in deciding the maximum gas prices was a separate , substantive
administrative decision, capable of being independently reviewed. 20 Counsel for the
respondents agreed with this proposition in oral argument. Nevertheless, even where
the Maximum Pric ing Methodology was found to be lawful, the substantive validity
alone of the methodology could n ot validate a decision taken in terms of it. It must
therefore follow that the Maximum Price Decision, when implemented, is capable of
independent review. Any other approach would be incorrect.
[37] As the Maximum Price Decision is capable of being independe ntly reviewed,
and the review application was brought within the requisite 180-day period, there is no
time bar to considering the merits of this review application. Thus, the question of
whether a methodology constitutes administrative action is left open.
19 See Supreme Court of Appeal judgment above n 4 at para 38.
20 In Oudekraal Estates (Pty) Ltd v City of Cape Town [2004] ZASCA 48; 2004 (6) SA 222 (SCA) 36; [2004]
JOL 12742 (SCA) at paras 29–31, the Supreme Court of Appeal held that the proper enquiry in each case is not
whether the first act was valid but rather whether its substantive validity was a necessary precondition for the
validity of consequent acts.
KHAMPEPE J
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(b) Review of the Maximum Price Decision
[38] I now turn to the review of the Maximum Price Decision. I find that the
Maximum Price Decision was irrational, however, I do not fully agree with the
Supreme Court of Appeal’s reasoning nor do I agree with the reasoning in the
concurring judgment written by my brother, Jafta J (the second judgment) . In
considering this review, I begin by dealing with whether the expert reports provided
by the parties can be relied upon. I then set out the statutory background to the
Maximum Price Decision . I follow that by explaining why I do not agree with the
second judgment. Next, I consider the findings of the Supreme Court of Appeal
relating to NERSA allowing Sasol to rais e prices and failing to mimic a competitive
market, in light of the submissions made by the parties . Lastly, I set out the other
grounds that point to irrationality . I find that NERSA , in applying the basket of
alternatives approach to Sasol , was irrational because it did not t ake into account a
vital material fact for making a rational decision in light of the empowering legislation
and purpose thereof – Sasol’s own costs and profits.
Expert reports
[39] The Supreme Court of Appeal found that the report s by economic expert s
submitted by NERSA were an impermissible attempt to justify the decision after the
fact and therefore could not be considered by the Court. 21 I disagree. It is true that
reasons formulated after a decision has been made cannot be relied upon to render a
decision rational, reasonable and lawful. 22 However, a report by an expert will not
necessarily constitute ex post facto (after the fact) reasons; it may merely explain the
rationale of the reasons that were provided prior to the making of the decision.
Economics is a specialist field and, to the extent that the report s provide explanations
for the process followed by NERSA in coming to the decision, this Court can benefit
from the explanations advanced. Moreover, the respondents submitted economic
reports in order to challenge NERSA’s decision. Significantly, the reports the
21 Supreme Court of Appeal judgment above n 4 at para 41.
22 National Lotteries Board above n 13 at paras 27-8.
KHAMPEPE J
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applicants rely on are meant to fend off the alleged faulty analys es and conclusions
found in the reports the respondents rely on.
Statutory background to the Maximum Price Decision
[40] Section 6(2)(f)(ii) of PAJA provides that administrative action will be
reviewable if it is not rationally connected to—
“(aa) the purpose for which it was taken;
(bb) the purpose of the empowering provision;
(cc) the information before the administrator; or
(dd) the reasons given for it by the administrator.”
[41] NERSA is r equired in terms of section 2(e)–(h) read with section 4(j) of the
Gas Act to promote the development of a competitive market for gas and gas services
in South Africa on an equitable basis considering the interests and needs of all parties
concerned. Where there is inadequate competition in the gas market, NERSA is
required to regulate and approve maximum gas prices – which it does in accordance
with the Maximum Pricing Methodology that it adopted.
[42] The prescribed manner referenced in section 4(g) of the Gas Act for regulating
the maximum gas price is described in regulation 4(3) –(4) of the Regulations.
Regulation 4(3) provides:
“[NERSA] must, when approving the max imum pr ices in accordance with
section 21(1)(p) of the Act—
(a) be objective i.e. based on a systematic methodology applicable on a consistent
and comparable basis;
(b) be fair;
(c) be non-discriminatory;
(d) be transparent;
(e) be predictable; and
(f) include efficiency incentives.”
KHAMPEPE J
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[43] Regulation 4(4) provides:
“Maximum prices referred to in sub regulation (3) must enable the licensee to—
(a) recover all efficient and prudently incurred investment and operation costs; and
(b) make a profit commensurate with its risk.”
[44] In the firs t draft of the Maximum Pricing Methodology , NERSA described its
mandate under the Gas Act and Regulations as follows:
“NERSA’s mandate is to apply regulation in the absence of a competitive market.
This implies NERSA should seek to replicate competitive m arket outcomes in
approving maximum prices.”
[45] NERSA also confirmed in its papers and during oral argument that it sought to
“mimic a competitive market in order to achieve competitive outcomes”.
[46] Under the previous dispensation, Sasol could arguably exploit its market power
by pricing up to the next best alternative energy source available to each individual
customer. This price discrimination is the process described above as market value
pricing.
The second judgment
[47] I have had the benefit of readi ng the second judgment, which agrees and
endorses the grounds adopted by the Supreme Court of Appeal. It holds that the
failure to consider Sasol’s marginal cost did not render the Maximum Price Decision
irrational under PAJA specifically because it claim s that rationality review is only of
decisions and not of process. It holds that even if procedural irrationality does render
the decision irrational, because procedural irrationality was not pleaded, this Court
should not decide this matter on that ground. I do not agree with this reasoning.
[48] I do not believe that we can separate process rationality and substantive
rationality in the way the second judgment purports to. The relevant question for
KHAMPEPE J
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rationality is whether the means (including the process of making a decision) are
linked to the purpose or ends. To my mind, rationality necessarily, whether found in
PAJA or anywhere else, must include some evaluation of process. If not, then we are
simply asking whether a decision is right or wrong based on post hoc reasoning.
[49] It is a natural and inescapable denouement that the process leading to a
decision “must also be rational in that it must be rationally related to the achievement
of the purpose for which the power is conferred”.23 As stated in Democratic Alliance:
“The means for achieving the purpose for which the power was conferred must
include everything that is done to achieve the purpose. Not only the decision
employed to achieve the purpose, but also everything done in the process of tak ing
that decision, constitute s means towards the attainment of the purpose for which the
power was conferred.”24
[50] Additionally, in Zuma, Navsa ADP stated that a rationality review also covers
the process by which the decision is made. 25 There is no reason why rationality under
PAJA should be given a different (more restrictive) meaning. It follows that
rationality under PAJA includes an assessment of whether the means (including
everything done in the process of taking the decision) links to the end. Probl ems
found in the process used to reach a decision can be very useful evidence or
illustration of a faulty rational link. How far that evaluation of process goes depends
on the facts of a particular case.
[51] For purposes of this case, I rely on the absence o f consideration of Sasol’s
marginal costs because it is sufficient evidence of a missing or faulty link between the
means and the ends. It is procedural irrationality that signifies the material
irrationality. In the following paragraphs I explain why I believe simply evaluating
23 Democratic Alliance v President of the Republic of South Africa [2012] ZACC 24; 2013 (1) SA 248 (CC) ;
2012 (12) BCLR 1297 (CC) (Democratic Alliance) at para 36.
24 Id.
25 Zuma v Democratic Alliance [2017] ZASCA 146; 2018 (1) SA 2000 (SCA) at para 82.
KHAMPEPE J
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the final Maximum Price Decision in a post hoc manner, as the Supreme Court of
Appeal and the second judgment do, does not lead to a legal conclusion of
irrationality. I then go on to explain why the procedural fault, and the sub stantive
irrationality it evidences, is a more viable route to finding irrationality.
The Supreme Court of Appeal’s findings on price increases and
mimicking a competitive market
[52] The Supreme Court of Appeal used a comparison between the prices before
and after the Maximum Price Decision as a barometer for measuring its irrationality. 26
The Court held:
“[T]he fact that its new methodology permitted such a huge increase above what
NERSA had already determined were excessively high prices, speaks volumes in
respect of the irrationality of using a methodology which produces such an absurd
and unreasonable result.”27
While it is tempting to follow the Supreme Court of Appeal down this path, I do not
find the matter as clear-cut for the reasons set out below.
[53] NERSA correctly points out that comparing the average price before the
decision and the maximum price after the decision is to compare apples to oranges.
One of these is an average actual price at a specific point in time, while the other is
just a limitation price on the overall market and at a completely different point in time.
[54] The pre- and post-price comparisons concern average prices, but when making
its determination whether there was inadequate competition, NERSA was worried
about isolated discrimi natory pricing decisions. The prices NERSA was concerned
with were prices for individual consumers that had more -expensive-than-average
26 Supreme Court of Appeal judgment above n 4 at paras 24 and 47.
27 Id at para 47.
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substitution costs – in other words, for consumers whose alternative energy choices
were considerably more expensive th an those of other consumers . NERSA argues
that those higher prices were successfull y brought under control by the Maximum
Price Decision.
[55] The Supreme Court of Appeal made factual finding s that NERSA’s decision
allowed Sasol to raise average prices and prices on the specific respondents in this
case. It is not this Court’s duty to settle factual disputes that have already been
determined by lower courts. 28 Therefore, we must accept the fa ctual findings of the
Supreme Court of Appeal in regard to its findings on price increases. However, the
Supreme Court of Appeal’s factual findings do not impact my reasoning because they
are compatible with NERSA’s claim that the Maximum Price Decision did in fact help
the specific consumers experiencing discriminatory pricing when NERSA made the
inadequate competition decision. Moreover, the fact that some prices rose after the
Maximum Price Decision does not inevitably mean that the decision was irrational.
[56] There was no regulatory constraint on prices before the
Maximum Price Decision, which logically suggests to me that there was some market
constraint on prices for the consumers paying lower prices under the former regime .
The consumers that were be nefitting from whatever constraints were protecting them
under the old pricing regime presumably s till enjoy the same protections; and a
regulatory maximum gas price higher than their old price would accordingly have no
effect on them. Their price increases may therefore be explained by changes in other
factors in the market .29 This illustrates the problem with the
Supreme Court of Appeal’s comparison between the pre and post -decision prices.
28 Makate v Vodacom [2016] ZACC 13; 2016 (4) SA 121 (CC); 2016 (6) BCLR 709 (CC) at para 39.
29 NERSA points towards inflation and the devaluation of the Rand against the Dollar over this time pe riod,
among other things, as legitimate causes of the price increases . I can imagine there are other unidentified
market factors that wou ld affect the actual price of gas, independently of whether the market is competitive or
monopolistic.
KHAMPEPE J
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Even in a perfectly competitive market, the Rand’s depreciation over the relevant time
would certainly cause a price increase on imported gas.30
[57] The factual finding that NERSA’s Maximum Price Decision enabled Sasol to
raise certain prices, including those charged to the respondents, does not have any
bearing on whether NERSA’s Maximum Price Decision allowed Sasol to
inappropriately raise prices on the consumers who had experienced the negative
effects of discriminatory pricing. The r espondents seem to want a pricing regime that
eliminates price discrimination t o achieve a second goal – lowering the prices for all
consumers – but they never explain why this second goal would be jus tified under the
Act, let alone necessary. Without endorsing this second goal, I am not convinced that
the Supreme Court of Appeal’s legal conclusion flows from its factual findings.
[58] Once I recognise that the relevant prices and consumers (the respondents) in
this case are not necessarily the ones that were most vulnerable under discriminatory
pricing, it becomes far less likely that NERSA allowed Sasol to raise prices
specifically in contravention of its own purposes and mandate . This is especially true
because the Maximum Price Decision was just as it was described – a decision about a
maximum price – and the Supreme Court of Appea l’s approach centres on the actual
prices charged by Sasol, which were not what NERSA was tasked with deciding.
[59] The Supreme Court of Appeal used the pricing analysis to support its finding
that NERSA acted irrationally in trying to mimic a competitive mar ket price. 31 It
found that “NERSA set a benchmark which established a price that a monopolist
30 NERSA points towards inflation and the devaluation of the Rand against the Dollar over this time pe riod,
among other things, as legitimate causes of the price increases. In July 2011, $1 was worth approximately R6.70
and by the beginning of 2016, it was worth approximately R16.10 - indicating that the Rand had lost more than
half its value over this time. Exchange rate data according to the South Africa n Reserve Bank, available at
https://www.resbank.co.za/Research/Rates/Pages/SelectedHistoricalExchangeAndInterestRates.aspx .
I can imagine there are other unidentified external factors that would affect the actual price of gas and the
protections from higher prices individual customers’ experience, whether the market is competitive or
monopolistic.
31 Supreme Court of Appeal judgment above n 4 at para 49.
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would have charged. This was hardly a rational decision taken to mimic a competitive
price”.32 Before this Court, the parties ’ arguments centred on whether NERSA ’s
approach was a rational way to mimic a competitive maximum price.
[60] In this regard, NERSA conceded that it was mandated, and did set out, to
mimic a competitive market. While it is tempting to find irrationality based on
NERSA’s failure to achieve this task, it may have some rational and even reasonable
explanations of how it set out to achieve its task.
[61] The basket of alternatives approach is a practical attempt at selecting a proxy
for the upper bound of a competitive supply -constrained market33 and not the actual
price of a competitive market. 34 The basket of alternatives approach that NERSA
chose is intended to stop the worst discriminatory pricing while attempting not to
regulate the actual price of piped -gas where it is not necessary to do so. Conceivably,
it may (to a reasonable degree for an imaginary market) accurately replicate the upper
bound of a South African competitive gas market that is still experiencing supply
constraints. Under market value p ricing, Sasol was able to discriminate b etween
consumers based on their individual next best alternative, but under the Maximum
Price Decision, that outcome may no longer be the reality for consumers with the most
expensive alternatives.35
32 Id at 46.
33 A supply-constrained market, in this case, i s one where there is more demand for piped gas at the marginal
cost of the cheapest supplier than that supplier can in reality supply.
34 NERSA suggests that the price in a competitive supply-constrained market may be set by the marginal costs
of the marginal supplier rather than the marginal costs of the most competitive supplier. While I am not willing
to fully endorse this argument, I do agree that in a competitive supply -constrained market the price will settle
somewhere above the marginal costs of the most competitive supplier.
35 The chosen ceiling price is an average of the alternatives, and in reality sets a “discount” lower price cap than
the average or even the median of the alternatives because it is weighted towards coal and electricity, which are
especially cheap energy alternatives in South Africa.
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[62] While the b asket of alternatives does seem somewhat arbi trary, it may be
rationally related to a potential competitive price in the piped -gas market.36 Further,
any proxy for the upper bound of an imaginary competitive supply-constrained market
would seemingly be arbitrary if not connected to a real -world metric like the costs of
the gas supply . In any event, I would expect NERSA, when trying to mimic this
upper bound, to come up with a number between Sasol’s marginal costs and the
marginal costs of the marginal supplier. The proxy NERSA chose seems to, more
likely than not, fall into that band. The only more reliable test of whether it falls into
that band, that I can conceive of, requires us to know Sasol’s marginal costs.
Required material factor for a rational Maximum Price Decision
[63] In Democratic Alliance , this Court held that it is an established principle of
administrative law that a failure to consider a relevant material factor in the process of
coming to an administrative decision can render the decision irrational. 37 The entire
process is tainted as irrational if the relevant factor that was not considered ought to be
central to finding a rational or even reasonable final outcome.
[64] Rationality is concerned with one question: do the means justify the ends?
Democratic Alliance developed the test for rationality by explaining that an absence of
a sufficient link can arise for procedural reasons. This is not a new or different type of
irrationality, but rather a way of evi ncing a broken or missing link betwee n the means
and the ends. The means chosen by an administrator include everything done (or not
done) in the process of making that decision.
[65] In this case, NERSA failed to consider Sasol’s marginal costs in the method it
used to determine the maximum gas price for Sasol. The decision to apply the ba sket
36 Even the economists for the respondents agree that alternative fuel can be relevant for finding a good proxy
maximum price for the imaginary competitive market . The Brattle Group Report submitted by the respondents
argues that the only relevant alternative is the marginal energy alternative. While this is distinct from NERSA’s
approach that considers many alternatives, it is a concession that looking at fuel a lternatives is generally a
rational approach.
37 Democratic Alliance above n 23 at paras 36 and 39.
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of alternatives approach specifically to Sasol was not rational. Sasol is a monopolist
and any rational attempt at regulating its prices needed to consider its costs in order to
fairly and equitably divide the economic surplus between Sasol’s profit and the
economic value for Sasol’s consumers.
[66] There are a number of interrelated reasons why Sasol’s marginal costs are a
necessary factor in determining its maximum price. It is important to note that
NERSA was regulating the prices of a recognised monopolist. Section 2(e) of the
Gas Act requires NERSA to take into account the interests and needs of all parties on
an equitable basis. 38 This is given expression in the fairness requirement found in
regulation 4(3). Importantly, this can be seen in regulation 4(4), which requires
NERSA to account for both costs and profit s of the regulated entity. This is set out in
more detail below.
[67] Once NERSA made the second decision that there was inadequate competition
in the piped-gas market, it was obliged to consider a maximum gas price speci fically
for the monopolist – Sasol.
[68] In both the draft and final inadequate competition determination NERSA itself
stated that the spot price for gas in a market environment would tend towards its
marginal costs. NERSA stated that—
“[i]n competitive market conditions, a firm prices its products at the level where the
price equals the marginal cost . I f the price is above marginal cost , the economics
theory concludes that such a firm has market power to influence prices without losing
business to competitors.”
38 Section 2(e) provides that one of the objects of the Gas Act is to—
“ensure that gas transmission, storage, distribution, trading, liquefaction and re -gasification
services are provided on an equitable basis and that the interests and needs of all parties
concerned are taken into consideration.”
KHAMPEPE J
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[69] Despite this acknowledgment, NERSA did not consider Sasol’s marginal costs
when trying to set a competitive maximum price. In a traditional competitive market ,
Sasol’s marginal co sts would be a required input for finding the competitive
maximum price.
[70] NERSA defends its decision not to use Sasol’s marginal costs by pointing out
that it was trying to mimic a competitive supply-constrained market. While it is true
that there is a supply constraint, the reality of the situation is that Sasol is a mo nopolist
and there are no competitors. Without a real-world competitor, NERSA’s inclusion of
the supply constraint as its justification for not considering Sasol’s marginal costs is a
backdoor which allows it to choose almost any imaginary maximum price it wants.
[71] I do not think NERSA is justified in trying to mimic the outer bounds of an
imaginary supply-constrained market if that approach would not allow it to regulate
the monopolistic vices it seeks to address. This would heavily favour the monopolist,
which would be absurd for a legal regime meant to rei n in the monopolist. Therefore,
in trying to quell the market power of the monopolist by setting a maximum price, it is
vital that a regulator consider s the monopolist’s marginal costs, even if there i s a
supply constraint. Without that inclusion , there is no way to te st whether the
maximum price will address the mischief of monopolistic market power.
[72] This is supported by the actual language of the Gas Act and the Regulations.
As explicated below, the requirements to consider the interests of all parties in this
market and equitably divide the economic surplus , strongly support requiring NERSA
to consider Sasol’s marginal costs when regulating its maximum price.
[73] NERSA was req uired to act in a manner consistent with section 2(e) of the
Gas Act, read with the fairness requirement found in regulation 4(3), as set out above.
To adhere to this section and regulation, NERSA had to set a maximum gas price th at
would balance the interests of both the monopolist and the consumers. This means
KHAMPEPE J
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that NERSA needed to find a way to evaluate the economic sur plus being created in
the piped-gas market and to divvy it up between the interested parties.
[74] NERSA recognised the importance of finding a formula that “reflects a balance
between encouraging new entry and equitable sharing of any economic surplus
between consumers and producers ”. It is hard to im agine how NERSA could decide
how to equitably split the surplus without considering Sasol’s profits and thus costs.
Under the basket of alterna tives approach, NERSA has no way of calculating Sasol’s
profit from any given price, and therefo re has no way of adequately judging the
equities of distribution of the surplus.
[75] NERSA was tasked with setting a ceiling price for S asol that allowed it to
recover its costs and to make a profit that was commensurate with its undertaken risks,
as set out in regulation 4(4). 39 In order for NERSA to rationally decide the m aximum
price which would include both costs and the chosen allowable profit , it needed to
know and consider Sasol’s marginal costs of production.
[76] Arguably, the Maximum Pricing Methodology has the potential to adhere to
regulation 4(4) because it offers th e licensee a choice between the pass -through of
costs and the basket of alternatives. The former takes into consideration the regulated
entity’s marginal costs whereas the latter does not. By choosing the latter, Sasol was
able to recoup its costs and po ssibly more than a reasonable profit. However,
regulation 4(4) must be read in context . This context includes the task of regulating
the prices of a recognised monopolist, the fairness constraint of regulation 4(3)(b), and
the lack of any language like “at least” in regulation 4(4) itself. Regulation 4(4)
cannot be read to say that NERSA’s task was merely to consider the licensee’s costs
39 Regulation 4(4) of the Regulations provides as follows:
“Maximum prices referred to in sub regulation (3) must enable the licensee to—
(a) recover all efficient and prudently incurred investment and operation costs;
and
(b) make a profit commensurate with its risk.”
KHAMPEPE J
26
when se tting the floor of a maximum price, instead it sets a floor while pointing
towards the rational approach that ought to be taken for finding the ceiling as well.
[77] Instead of considering Sasol’s costs, NERSA considered the imaginary
marginal costs of product ion for an admittedly unknown gas seller. The baske t of
alternatives option of the Maximum Pricing M ethodology represents these imaginary
marginal costs of production. There is likely some merit in this approach when trying
to understand the limitations of an entrant into an imaginary supply -constrained
market. However, it is totally divorced from a rational approach to choosing the
maximum profit allowed by a recognised monopolist and then adding that profit onto
the monopolist’s actual costs.
[78] In t rying to replicate a competitive market , NERSA considered what the
maximum marginal costs of production of a fictional gas seller might be before it
could no longer compete with the energy substitut es. NERSA then used those
imaginary marginal costs of production when setting Sasol’s maximum reasonable gas
price. One of the most relevant factors in NERSA’s entire equation for specifically
regulating Sasol ought to have been Sasol’s own marginal costs of production.
Without considering Sasol’s costs , NERSA cou ld not set a maximum price that
included an equitable division of profit for Sasol and economic value creation for
consumers. Sasol’s costs are a mandatory input to this kind of exercise. NERSA
failed to consider this mandatory input , and thus I cannot find that NERSA acted
rationally in deciding Sasol’s maximum gas price.
(c) Review of the Tariff Decision
[79] In their founding papers in the High Court, the respondents had attacked the
Tariff Decision on a series of self-standing grounds. However, these were not pursued
in the Supreme Court of Appeal. Instead, the respondents adopted the position that
the attack on the Maximum Price Decision would also determine the fate of the
Tariff Decision. The Supreme Court of Appeal agreed that the two decisions were
linked and that, as the Maximum Price Decision fell to be set aside, so too did the
KHAMPEPE J
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Tariff Decision. The Court did so without assessing the lawfulness of the
Tariff Decision separately from the Maximum Price Decision.
[80] Before this Court, the applicants contend that tariffs and prices are distinct and
that the Supreme Court of Appeal erred in not appreciating the difference between the
two. First, t he applicants contend that the essence of the distinction lies in the
definition of “price” and “tariff” as is contained in section 1 of the Gas Act. They
contend that, on the one hand, prices amount to the payment for gas as a commodity –
in other wor ds, payment for the molecules, on the other hand, tariffs amount to the
payment for services provided in relation to gas. In other words, the payment for the
transportation of molecules. Second, the applicants submit that even the powers given
to NERSA by the Gas Act are different when it comes to how it must determine
maximum prices and tariffs. The applicants submit that under section 21(1)(p) of the
Gas Act, NERSA only has the power to approve maximum prices whereas it has the
power to regulate actual tariffs in terms of section 4(h) . Third, the applicants contend
that the methodologies applied by NERSA to approve the transmission tariffs and the
maximum prices are also different. The applicants contend that tariffs are linked to
the underlying capital asset base utilised to render the service, while prices are, at the
election of the licensee, linked to either the basket of alternatives or the pass -through
of costs.
[81] The respondents submit that the Supreme Court of Appeal was correct in its
treatment of the Tariff Decision. The res pondents pla ce heavy reliance on
regulation 4(6) and 4(13) of the Regulations and submit that the Regulations envisage
a composite total price that, while comprised of constituent elements – is a single
price for a single, undifferentiated product as received by the customer which also gets
invoiced at the same time. The respondents argue that at all material times, NERSA
understood that it was entrusted with the task of determining the maximum price that a
customer would pay for the receipt of gas at its premises.
KHAMPEPE J
28
[82] It is true that the tariff is a constituent element of the maximum price of gas and
that the entire process geared to the determination of a “resultant sum”. The
Maximum Pricing Methodology makes it perspicuous that the Tariff Guidelines give
guidance on all tariff -related activities, which are charged for gas services and which
must be added to the price(s) for piped gas. The Maximum Pricing Methodology
states that the determination of the trading margins (a charge for a gas service) in that
methodology is therefore referenced to the Tariff Guidelines to ensure that there is
consistency in the decisions taken by NERSA.
[83] So while the Tariff Decision may have an influence on the
Maximum Price Decision, the converse is not true. The maximum price of gas is not a
constituent element of the tariff price. The fact that the tariff is a constituent element
of the maximum price of gas does not, therefore, mean that the setting aside of the
Maximum Price Decision invalidates the Tariff Decision.
[84] The independence of the Tariff Decision from the Maximum Price Decision is
clear when one looks at the methodology used in the determination of the
Tariff Decision. In Sasol’s case, it elected to use the rate of return methodology in its
Tariff Application. This methodology adjusts overall tariff levels according to the
company’s efficient level of accounting costs and costs of capital and is based on the
calculation of the revenue the company will be allowed to e arn to cover its efficient
operational expenses and to provide a return on its efficient level of investment in
capital assets. The Tariff Guidelines set out the components of the allowed revenue
formula under the rate of return methodology – none of which include or reference to
the maximum gas price.
[85] The Tariff Decision is made using a different methodology and formula which
is entirely independent from the Maximum Price Decision. All of the elements that
are considered in the determination of the Tari ff Decision are independent from the
Maximum Price Decision. Setting aside the Maximum Price Decision without setting
aside the Tariff Decision will therefore not produce any absurd consequences – the
KHAMPEPE J
29
Tariff Decision will remain and when the Maximum Price Decision is reconsidered, it
can refer to or utilise the Tariff Decision insofar as it may have any influence on that
decision.
[86] It therefore seems nonsensical to set aside the Tariff Decision when the result
would be that NERSA must re -take that decision in exactly the same way, taking into
account exactly the same factors that will ultimately lead to exa ctly the same result. I
would uphold the appeal insofar as it relates to the setting aside of the Tariff Decision.
Remedy
[87] Sasol submits that even if th is Court were to find against the applicants, the
appropriate remedy would be to allow the Maximum Price Decision to stand. This is
because that decision has expired and is of no force and effect. In the event that
NERSA’s determination is less than what Sasol has charged its customers over the
relevant period, it would be unduly prejudicial to require it to repay a portion of the
agreed price to its customers, especially where Sasol has arranged its affairs in
accordance with the Maximum Price Decision. In the event that NERSA’s
determination is more than what Sasol has charged its customers over the relevant
period, then the exercise of determining a new maximum price would have been an
exercise in futility and a waste of public resources.
[88] However, Sasol did not provide an alternative remedy in the event that this
Court found against them.
[89] The default remedy for declarations of invalidity of administrative action is to
set aside the invalid action and remit it to the decision maker for reconsideration. 40
Once a decision has been set aside, it ceases to have an effect and is treated as if it
40 Trencon Construction (Pty) Ltd v Industrial Development Corporation o f South Africa Ltd [2015] ZACC 22;
2015 (10) BCLR 1199 (CC); 2015 (5) SA 245 (CC) at para 42.
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30
never existed. 41 Although this is the default remedy, it remains a discretionary
remedy. As a result, there are certain instances w here setting aside and non -remittal
would be appropriate. The case of JFE Sapela Electronics is a prime example here. 42
In that case, Scott J reasoned that a remittal would be impractical and disruptive and
accordingly held that it would be in the interests of finality, pragmatism and
practicality for the invalid action in that case not to be remitted. This view was further
adopted in Millennium Waste Management.43 Oudekraal has also set out that legality
on occasion may be overridden by these competing considerations.44
[90] Moreover, courts generally refer the matter to the original decision -maker,
rather than correct the decision. This is so because courts prefer to exercise deference
and do not want to be perceived as usurping the decision-making authority and powers
that have been delegated to an administrator. The court in Johannesburg City Council
v Administrator, Transvaal held that “the court is slow to assume a discretion which
has by statute been entrusted to another tribunal or functionary”. 45 This is a caution
that courts should not hastily substitute the decisions of administrators with their own.
This Court does not have the necessary information in front of it to step into the shoes
of NERSA, including most importantly , Sasol’s marginal costs , and therefore cannot
set a maximum price.
[91] Given the finding of invalidity, and the fact that invalidity operates with
retrospective effect,46 we are left with no valid maximum price existing for the period
41 Pikoli v President of the Republic of South Africa ZAGPPHC 99; 2010 (1) SA 400 (GNP) at 408-9.
42 Chairperson: Standing Tender Committee v JFE Sapela Electronics (Pty) Ltd [2005] ZASCA 90; 2008 (2)
SA 638 (SCA); [2005] 4 All SA 487 (SCA) (JFE Sapela Electronics).
43 Millennium Waste Management (Pty) Ltd v Chairperson of the Tender Board: Limpopo Province [2007]
ZASCA 165; 2008 (5) BCLR 508; 2008 (2) SA 481 (SCA).
44 Oudekraal above n 20 at para 36.
45 Johannesburg City Council v Administrator, Transvaal 1969 (2) SA 72 (T) at 76D-E.
46 See most recently this Court’s j udgments in Aquila Steel (S Africa) (Pty) Ltd v Minister of Mineral Resources
[2019] ZACC 5; 2019 (4) BCLR 429 (CC) ; Corruption Watch NPC v President of the Republic of South Africa ;
and Nxasana v Corruption Watch NPC [2018] ZACC 23; 2018 (10) BCLR 1179 (C C); 2018 (2) SACR 442
(CC).
KHAMPEPE J
31
in dispute. The applicants have not provided any compelling reasons why it would be
in the interests of justice to depart from the default remedy. It is not true that the order
will necessarily have no practical effect – Sasol itself says that it may have the resul t
of it having to repay its customers. The applicants have failed to furnish this Court
with reasons that would persuade it to let the Maximum Price Decision stand, except
for the possible inconvenience that may follow. Accordingly, remittal is the
appropriate remedy in this matter.
Costs
[92] Although the applicants have been successful in the appeal in relation to the
Tariff Decision, this is but a small part of the appeal. The respondents have been
successful in the main part of the appeal, and costs should accordingly follow.
Order
[93] In the result, the following order is made:
1. The application for leave to appeal is granted.
2. The appeal is upheld in part, insofar as it relates to the Supreme Court of
Appeal’s setting aside of the decision of the first applicant of
26 March 2013 to approve the transmission tariffs for the period of
26 March 2014 to 30 June 2015.
3. The remainder of the appeal is dismissed.
4. Paragraph 2(a) of the order of the Supreme Court of Appeal is set aside
and substituted with the following:
“(a) The first applicant ’s decision of 26 March 2013 to approve the
application by the second applicant for maximum gas prices and
for a trading margin for the period 26 March 2014 to
30 June 2017 is reviewed and set aside.”
5. The applicants must pay t he respondents’ costs in this Court, including
the costs of two counsel.
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JAFTA J
[94] I have had the benefit of reading the judgment of my colleague Khampepe J
(first judgment). I agree with the outcome proposed and most of the reasons
underpinning that outcome. But with regard to the invalidity of the
Maximum Price Decision, I prefer disposing of the matter on the ground adopted by
the Supreme Court of Appeal.
[95] I prefer the route followed by the Supreme Court of Appeal for four reasons.
First, as it appears below, the pleaded case of rationality was directed at the impugned
decisions and not the process leading up to those decisions. It was the decisions
themselves which were sai d to be irrational. The test that applies to rationality of
decisions differs from the standard for determining rationality of process.
[96] Second, the rationality ground that was pursued in the courts below was the one
pleaded. Consequently, the decision o f the Supreme Court of Appeal was based on
the irrationality of the Maximum Price Decision itself and not the process preceding it.
As this is an appeal against that decision, it must be upheld on the same ground of
review unless the reasons furnished by the Supreme Court of Appeal were wrong. I
am not persuaded that the Supreme Court of Appeal reached a correct outcome but for
wrong reasons.
[97] Third, at the hearing of this appeal, NERSA and Sasol in challenging the
judgment of the Supreme Court of Appeal, restricted themselves to the reasons
furnished by that Court. Likewise, the respondents in defending the judgment, limited
themselves to the rationality of the decisions of NERSA. None of the parties
addressed rationality of process. Therefore, I am re luctant to decide this matter on a
legal issue that was not addressed by the parties. In Magajane this Court declined to
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decide an issue raised in the pleadings but in respect of which no argument was
presented.47
[98] Fourth, the grounds of review advanced by the respondents (applicants in the
High Court) in attacking NERSA’s decisions were all based on PAJA. PAJA
separates grounds of review directed at a process leading up to an administrative
action from those that relate to the action itself. Under PAJA, rationality as a ground
of review is limited to an administrative action. It is not mentioned in respect of
process.
[99] It is now convenient to substantiate each of these reasons.
Rationality addressed by the parties
[100] The parties’ argument dealt with the ra tionality of the impugned decisions and
not procedural rationality. However, this does not mean that this Court was not
entitled, mero motu (of its own accord), to raise procedural rationality if conditions for
doing so were met. The first one is that pr ocedural rationality must be apparent on the
papers. If it does not arise from the record, it cannot be raised mero motu . The
second condition is that, having raised it, the Court must give the parties an
opportunity to address the point.48
[101] The second re quirement accords with the parties’ fair hearing right that
requires them to be heard before a decision that affects their rights is taken. This is
fundamental to our system of justice. And this opportunity is afforded to the parties
even where it appear s that the point raised by the Court is unanswerable. As this
Court noted in My Vote Counts, points which are apparently unanswerable may still be
47 Magajane v Chairperson, North West Gambling Board [2006] ZACC 8; 2006 (5) SA 250 (CC); 2006 (10)
BCLR 1133 (CC) at paras 26-32.
48 See CUSA v Tao Ying Metal Industries [2008] ZACC 15; 2009 (2) SA 204 (CC); 2009 (1) BCLR 1 (CC) at
para 68.
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answered fully. 49 Here neither requirement is met. Procedural rationality is not
apparent on the papers and the parties were not afforded a chance to address it.
Pleaded case
[102] It is common cause that before the impugned decision was taken, Sasol was
allowed to charge monopolist prices for the gas it supplied to various distributors in
this country. This attrac ted the attention of NERSA which is empowered by the
Gas Act to intervene by fixing maximum prices in circumstances “where there is
inadequate competition”.50 Evidently the purpose for which this power is conferred is
to protect consumers against monopolis t prices such as those that were charged by
Sasol. This is achieved by fixing maximum prices which oblige suppliers of gas to
charge competitive prices.
[103] Therefore, when NERSA took the Maximum Price Decision, it sought to
achieve the objective of forcing Sasol to charge competitive prices. It was this
decision that was challenged by the respondents on rationality, among other grounds.
The respondents formulated their rationality challenge in these terms—
“by virtue of section 6(2)(f)(ii) of PAJA, the decisions were not rationally connected
to (aa) the purpose for which it was taken; (bb) the purpose of the empowering
provision; (cc) the information before the administrator; (dd) the reasons given for is
by the administrator.”
[104] Evidently in pleading rationality the respondents cut the relevant part from
PAJA and pasted it into the founding affidavit. The quoted part of their pleading
reflects the wording of section 6(2)(f)(ii) of PAJA in its original form. But an
important thing emerging from the pleading so formulated is that the subject -matter of
the rationality challenge is the decisions of NERSA. It is the decisions which it was
49 My Vote Counts NPC v Speaker of the National Assembly [2015] ZACC 31; 2016 (1) SA 132 (CC); 2015 (12)
BCLR 1407 (CC) at para 177.
50 Section 21(1)(p) read with section 4(g) of the Gas Act.
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said were not rationally connected to the purpose for which they were taken or the
purpose of the empowering provision or the information before NERSA or the reasons
given by it.
[105] This pleading does not incorporate a challenge directed at a process leading up
to the Maximum Price Decision. Rather it asserts absence of a rational link between
that decision and the purpose for which it was taken or the purpose of the empowering
legislation. The last two objects mentioned in the pleading do not apply here as they
do not relate to purpose.
Overlooking Sasol’s marginal costs
[106] This was pleaded in these specific terms—
“by virtue of section 6(2)(e)(iii) of PAJA, in that irrelevant considerations were taken
into account or relevant considerations were not considered.”
[107] This is the only ground in PAJA that addresses the failure of the
decision-maker to take into consideration relevant factors. That failure, of itself alone,
constitutes a ground of review. But this ground bears no relation to rationality. It
does not form part of section 6(2)(f) which deals with rationality. Instead, it is located
in section 6(2)(e).
[108] Section 6(2)(e) of PAJA provides:
“(2) A court or tribunal has the power to judicially review an administrative action
if—
. . .
(e) the action was taken—
(i) for a reason not authorised by the empowering provision;
(ii) for an ulterior purpose or motive;
(iii) because irrelevant considerations were taken into account or
relevant considerations were not considered;
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(iv) because of the unauthorised or unwarranted dictates of
another person or body;
(v) in bad faith; or
(vi) arbitrarily or capriciously.”
[109] The differences in structure and language used in subsections (2)(e) -(f) do not
support an interpretation that the failure to consider relevant factors is part of the
rationality ground. The two grounds are listed separately as self -standing grounds,
upon which an applicant for review may individually rely. Even at common law a
failure to take account of relevant factors has always been regarded as different from
taking a decision for a purpose other than the one for which the power was granted.
[110] But at common law both these grounds, together with others are taken to be
proof of the decision -maker’s failure to apply his or her mind to the relevant issues.
In Johannesburg Stock Exchange Corbett JA said:
“Section 17(3) clearly confers a discretion upon the presiden t and, provided that his
decision to suspend shares is taken after due consultation with the head of the listings
department, it cannot be challenged in a court of law except upon what are known as
review grounds. Broadly, in order to establish review gro unds it must be shown that
the president failed to apply his mind to the relevant issues in accordance with the
“behests of the statute and the tenets of natural justice” . . . . Such failure may be
shown by proof, inter alia, that the decision was arrived at arbitrarily or capriciously
or mala fide or as a result of unwarranted adherence to a fixed principle or in order to
further an ulterior or improper purpose; or that the president misconceived the nature
of the discretion conferred upon him and took in to account irrelevant considerations
or ignored relevant ones; or that the decision of the president was so grossly
unreasonable as to warrant the inference that he had failed to apply his mind to the
matter in the manner aforestated . . . . Some of these grounds tend to overlap.”51
[111] What is apparent from this common law statement on grounds of review is that
taking a decision for an improper purpose and ignoring relevant factors are separate
51 Johannesburg Stock Exchange v Witwatersrand Nigel Ltd 1988 (3) SA 132 (A).
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grounds. While there may be some overlap between some of the list ed grounds, they
remain separate. Indeed it would be extraordinary to read the two grounds as one in
PAJA, despite its language and scheme.
Duty to rely on PAJA
[112] Since PAJA is applicable to the present claim, the applicants for review were
bound to rely on the grounds listed in section 6 of PAJA. 52 Where legislation has
been passed to give effect to constitutional rights, the party that seeks to vindicate
those rights must rely on that legislation and not directly on the Constitution.
Therefore, it would not have been competent for the review applicants to rely on the
principle of legality sourced directly from the Constitution.
[113] As PAJA does not provide for procedural rationality as a ground for review,
reliance on this ground may not be endorsed. Litig ants should not be allowed to
sidestep PAJA where it applies, by relying on the principle of legality. To permit this
would seriously undermine PAJA and the constitutional principle of subsidiarity.
Reliance on the principle of legality must be endorsed where PAJA does not apply.
This approach would bring coherence in our jurisprudence. As was noted in
Democratic Alliance,53 reliance on procedural rationality was permitted in executive
decisions to which PAJA did not apply.
Procedural rationality
[114] Up to now this Court has recognised rationality of process in respect of
executive decisions only.54 In Democratic Alliance this Court was concerned with the
exercise of executive power by the President who purported to appoint a
National Director of Public Pros ecutions. It emerged from the facts that the President
52 Bato Star Fishing above n 15 at para 25.
53 Democratic Alliance above n 23.
54 Id.
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had ignored adverse findings on the suitability of the candidate he sought to appoint,
in circumstances where he had said he accepted those findings.
[115] Recognising that the President’s decision could b e challenged on rationality
this Court declared:
“This Court in SARFU said that ‘the exercise of the President’s constitutional power
to appoint a commission of enquiry is not directly governed by the principle in the
Johannesburg Stock Exchange case’. It follows that this principle would not directly
govern the President’s power to appoint the National Director either. That is not to
say that ignoring relevant factors can have nothing to do with rationality. If in the
circumstances of a case, there is a failure to take into account relevant material that
failure would constitute part of the means to achieve the purpose for which the power
was conferred. And if that failure had an impact on the rationality of the entire
process, then the final decision may be rendered irrational and invalid by the
irrationality of the process as a whole. There is therefore a three -stage enquiry to be
made when a court is faced with an executive decision where certain factors were
ignored. The first is whether the factors ignored are relevant; the second requires us
to consider whether the failure to consider the material concerned (the means) is
rationally related to the purpose for which the power was conferred; and the third,
which arises only if the answer to the second stage of the enquiry is negative, is
whether ignoring relevant facts is of a kind that colours the entire process with
irrationality and thus renders the final decision irrational.”55
[116] It is significant to note that PAJA did not apply to the P resident’s decision in
Democratic Alliance simply because his decision did not constitute administrative
action. Consequently, section 6(2)(e) of PAJA could not be invoked. Faced with this
dilemma, the Court developed and extended the principle of ration ality to also cover
the process leading up to a decision and concluded that if the process followed when
making a decision is tainted by irrationality, a decision taken as a result of such
process would itself be irrational. This Court is yet to pronounce on whether
55 Id at para 39.
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rationality of process may be invoked to attack administrative action. Therefore the
genesis of procedural rationality is Democratic Alliance.
Rationality of process or decision
[117] Our jurisprudence draws a clear line between two forms of ration ality. That is
between rationality of a decision and rationality that relates to process. This is not
surprising because the taking of a decision and the process that precedes it are separate
stages in decision -making. In Democratic Alliance this distin ction was illustrated
thus:
“The conclusion that the process must also be rational in that it must be rationally
related to the achievement of the purpose for which the power is conferred, is
inescapable and an inevitable consequence of the understanding that rationality
review is an evaluation of the relationship between means and ends. The means for
achieving the purpose for which the power was conferred must include everything
that is done to achieve the purpose. Not only the decision employed to achi eve the
purpose, but also everything done in the process of taking that decision, constitutes
means towards the attainment of the purpose for which the power was conferred.”56
[118] The difference between decisional and procedural irrationality was also
observed by the High Court in Minister of International Relations.57 In that matter the
Court stated:
“The above conclusion leads to the question of procedural rationality of the notice of
withdrawal. The requirement for rationality is that government action mus t be
rationally connected to a legitimate government purpose. The principle of legality
requires that both the process by which the decision is made and the decision itself
must be rational. In [ Democratic Alliance] the Constitutional Court explained that to
determine procedural irrationality is to look at the process as a whole and determine
whether steps in the process were rationally related to the end sought to be achieved;
56 Id at para 36.
57 Democratic Alliance v Minister of International Relations and Cooperation 2017 (3) SA 212 (GP) (Minister
of International Relations).
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if not, whether the absence of a connection between a particular step is so unrelated to
the end as to taint the whole process with irrationality. In the present case the
procedural irrationality lies in the finding that the national executive did not consult
Parliament, as it was obliged to, before delivering the notice of withdrawal.”58
[119] A further distinction between the two forms of rationality is to be found in the
standard applicable to determining rationality in each of them. With regard to the
rationality of a decision, the test is simply whether there was a rational connecti on
between the decision taken and the purpose for which the power exercised was given.
A different standard applies to rationality that concerns process. As this Court noted
in Democratic Alliance in the statement quoted in paragraph 115, a three -stage
enquiry is applied to determine whether a process that was followed is so irrational as
to render the final decision irrational.
[120] I am not persuaded that here the three -stage test mentioned in Democratic
Alliance was met. Overlooking Sasol’s marginal costs , as I see it, would render the
Maximum Price Decision irrational only if that decision could not be reached without
it. The purpose of taking marginal costs into account is spelt out in regulation 4(4)
which requires that the maximum price fixed must ena ble a licensee like Sasol to
recover its operational costs. The facts, as determined by the Supreme Court of
Appeal, show that the impugned decision did not disable Sasol from doing so.
Instead, on those facts Sasol was able to charge prices that were ev en higher than the
monopolist prices it charged before the Maximum Price Decision was taken.
[121] Therefore, it does not appear to me that in these circumstances the failure to
consider Sasol’s marginal costs vitiated the Maximum Price Decision because the
purpose of recovering operational costs and making profit was satisfied. Since
regulation 4 does not expressly oblige NERSA to consider marginal costs, it was open
58 Id at para 64.
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to it to adopt whatever means it chose in taking the impugned decision. In affirming
this proposition in Albutt59 this Court said:
“The Executive has a wide discretion in selecting the means to achieve its
constitutionally permissible objectives. Courts may not interfere with the means
selected simply because they do not like them, or because there are other more
appropriate means that could have been selected. But, where the decision is
challenged on the grounds of rationality, courts are obliged to examine the means
selected to determine whether they are rationally related to the objective s ought to be
achieved. What must be stressed is that the purpose of the enquiry is to determine not
whether there are other means that could have been used, but whether the means
selected are rationally related to the objective sought to be achieved. And if,
objectively speaking, they are not, they fall short of the standard demanded by the
Constitution. This is true of the exercise of the power to pardon under
section 84(2)(j).”60
[122] However, the inapplicability of rationality of process and the failure to
establish it here do not mean that the Maximum Price Decision was rational. As
mentioned, the Supreme Court of Appeal whose decision is under appeal, held that the
impugned decision was irrational because there was no rational link between it and the
purpose of imposing competitive prices and bringing to an end Sasol’s monopoly.
[123] Having determined the purpose for fixing maximum prices contemplated in
section 21(1)(p) of the Gas Act, the Supreme Court of Appeal held:
“Instead, and in my view . . . NERSA di d the very opposite. It proceeded to
determine a methodology which was once again referenced to more expensive
alternative sources of fuel, and which had the effect of permitting an increase rather
than reducing Sasol Gas’s monopolistic prices which NERSA had already concluded
were too high. By employing the cost of a basket of alternative fuels as a proxy for a
maximum price of gas, NERSA set a benchmark which established a price that a
59 Albutt v Centre for the Study of Violence and Reconciliation [2010] ZACC 4; 2010 (3) SA 293 (CC); 2010 (5)
BCLR 391 (CC).
60 Id at para 51.
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monopolist would have charged. This was hardly a reasonable or rati onal decision
taken to mimic a competitive price. The price it set ought to have been designed to
compensate for the lack of a competitive market but the method it employed did not,
and could not, achieve that end. Indeed, although there is a dispute bet ween the
experts regarding the precise effect upon customers such as the appellants, the
adoption of the methodology NERSA used resulted in the maximum price being
determined in an amount arguably some 300% higher than what the appellants had
previously been paying.”61
[124] The Supreme Court of Appeal found that the dispute between the evidence
tendered by the experts was limited to the precise effect the impugned decision had on
various circumstances. But that Court found that, notwithstanding this divergence, the
impugned decision had allowed Sasol to charge prices that were even higher than its
monopolist prices it had earlier charged. I am not convinced that these factual
findings were not properly made and that intervention by this Court is warranted.
Generally, this Court must decide appeals on the basis of the factual findings made by
the courts below. No compelling reasons were advanced for a departure from this
general principle and I can think of none.
[125] In Makate this Court considered the role it pla ys in our appellate system and
declared that it decides cases on facts as determined by lower courts:
“Moreover, this being the highest court in the Republic which is charged with
upholding the Constitution, and deciding points of law of general public im portance,
this court must not be saddled with the responsibility of resolving factual disputes
where disputes of that kind have been determined by lower courts. Deciding factual
disputes is ordinarily not the role of apex courts. Ordinarily, an apex cour t declares
the law that must be followed and applied by the other courts. Factual disputes must
be determined by the lower courts and when cases come to this court on appeal, they
are adjudicated on the facts as found by the lower courts. Of course this principle
does not apply to matters that come directly to this court.”62
61 Supreme Court of Appeal judgment above n 4 at para 46.
62 Makate above n 28 at para 39.
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[126] Proceeding from the premise that the Maximum Price Decision permitted Sasol
to charge even more exorbitant prices, the Supreme Court of Appeal concluded:
“Consequently, the methodolo gy NERSA adopted resulted in an even higher
monopoly price than that which Sasol Gas was already charging — and which
NERSA itself regarded as too high and a misuse of market power — rather than a
price in a hypothetical competitive market. What it was ob liged to do was to think
away the monopoly Sasol Gas enjoyed and determine the maximum price which
would have been charged in a hypothetical competitive market in which suppliers
competing with each other would have sought to undercut each other’s prices in order
to take business from each other. By its very nature, the methodology NERSA
adopted did not do this. Using that methodology to determine a maximum
competitive price was therefore irrational for a regulator such as NERSA.”63
[127] In these circumstances it is apparent that a rational connection between the
Maximum Price Decision (the means) and the competitive prices (the end), does not
exist. The means selected by NERSA to create an environment akin to competition
were not capable of achieving the purp ose for which the section 21(1)(p) power was
conferred. Therefore irrationality has been established.
[128] It is for these reasons that I support paragraph 4 of the order proposed in the
first judgment. With regard to other paragraphs of that order, I concur in the reasons
set out in the first judgment.
63 Supreme Court of Appeal judgment above n 4 at para 49.
For the First Applicant:
For the Second Applicant:
For the Respondents:
I V Maleka SC, H Mutenga and
N Kekana instructed by Werksmans
Attorneys
A Cockrell SC and M Stubbs instructed
by Bowmans
W Trengove SC and J J Meir ing
instructed by Norton Rose Fulbright
South Africa Inc