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PG Group Ltd and Others v National Energy …

PG Group Ltd and Others v National Energy Regulator of South Africa and Another (150/2017) [2018] ZASCA 56; 2018] 3 All SA 52 (SCA); 2018 (5) SA 150 (SCA) (10 May 2018)

81 Reportability

Administrative Law

Brief Summary

Administrative Law — Review of Regulatory Decisions — Appeal against National Energy Regulator's approval of maximum gas prices — Appellants, large-scale consumers of piped-gas, challenged NERSA's decision to approve Sasol Gas's tariff application, claiming it was unreasonable and irrational — High Court dismissed application based on alleged unreasonable delay — Supreme Court of Appeal held that the determination of the methodology for gas price regulation constituted administrative action, and that NERSA's decision was not rationally connected to the information before it — Appeal upheld, NERSA's decisions reviewed and set aside.

Full Judgment Text (Click to expand)

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[2018] ZASCA 56
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PG Group Ltd and Others v National Energy Regulator of South Africa and Another (150/2017) [2018] ZASCA 56; 2018] 3 All SA 52 (SCA); 2018 (5) SA 150 (SCA) (10 May 2018)

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THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 150/2017
In
the matter between:
PG
GROUP (PTY) LTD
FIRST

APPELLANT
THE
SOUTH AFRICAN BREWERIES

SECOND APPELLANT
(PTY)
LTD
CONSOL
GLASS (PTY) LTD

THIRD APPELLANT
NAMPAK
LIMITED

FOURTH APPELLANT
MONDI
LIMITED
FIFTH

APPELLANT
DISTRIBUTION
& WAREHOUSING

SIXTH APPELLANT
NETWORK
LTD
ILLOVO
SUGAR SOUTH AFRICA LTD

SEVENTH APPELLANT
and
NATIONAL
ENERGY REGULATOR
FIRST

RESPONDENT
OF
SOUTH AFRICA
SASOL
GAS LIMITED

SECOND RESPONDENT
Neutral
citation:
PG
Group & others v NERSA
(150/2017)
[2018] ZASCA 56
(10 May 2018)
Coram:
Lewis,
Ponnan and Leach JJA and Davis and Makgoka AJJA
Heard:
26
February 2018
Delivered:
10
May 2018
Summary:
Administrative
action – whether the determination of a methodology used to
regulate gas prices under
s 21(1)
(p)
of
the
Gas Act 48 of 2001
is administrative action – whether
a determination by the regulator under that section which resulted in
an increase
in permissible maximum gas prices was rational.
ORDER
On
appeal from:
Gauteng
Division of the High Court, Pretoria (A Louw J sitting as court of
first instance):
1
The
appeal succeeds with costs, including the costs of two counsel.
2
The
order of the court a quo is set aside and substituted by the
following:
‘
(a)
The decisions by the first respondent on 26 March 2013 to approve
applications by the second respondent (i)
for maximum gas prices and
for a trading margin for the period 26 March 2014 to 30 June 2017,
and (ii) for transmission tariffs
for the period 26 March 2014 to 30
June 2015, are reviewed and set aside.
(b)
Any maximum gas prices subsequently approved by the first respondent
for the second respondent shall
apply retrospectively with effect
from 26 March 2014 until the date of termination of such
approval.
(c)
The costs of this application shall be paid by the respondents
jointly and severally, the one
paying the other to be absolved.’
JUDGMENT
Leach
JA (Lewis, Ponnan JJA and Davis, Makgoka AJJA concurring)
[1]
The first respondent, the National Energy Regulator of South Africa
(NERSA), was established as a juristic person under s 3
of the
National Energy Regulator Act 40 of 2004 (the Energy Regulator Act).
One of its functions is to regulate the piped gas industry.
Piped
natural gas is a safe and environmentally friendly fuel used in a
number of production industries as well as in the generation
of
power. Its use is on the increase, gas consumption having tripled
during the decade before December 2012.
[2]
On 26 March 2013, NERSA granted an application made by the second
respondent Sasol Gas Limited (Sasol Gas) to determine a tariff
of the
maximum prices it is permitted to charge for piped-gas. Sasol Gas
effectively enjoys a monopoly in respect of the supply
of piped-gas
in this country and this tariff determination had profound effects on
the piped-gas industry. The seven appellants
are all large-scale
consumers of piped-gas, and the new tariffs led to substantial
increases in the prices they had been paying.
Complaining that these
increases were unreasonable and irrational, they applied to the
Gauteng Division of the High Court, Pretoria
to review and set aside
NERSA’s decision.
[3]
The court a quo did not enter into the merits of the application.
Instead it held that there had been an unreasonable delay
before the
proceedings were launched and, on that basis alone, it dismissed the
application. The appeal to this court is with leave
of the court a
quo.
[4]
The history of the matter is important to the resolution of the
dispute. Sasol Gas is a wholly-owned subsidiary company of Sasol

Limited (Sasol), an international energy and chemical company listed
on both the Johannesburg and New York stock exchanges. At
the turn of
the last century, Sasol formed a joint venture with a partner in
Mozambique to develop natural gas fields in that country
in order to
pump gas from there to South Africa, for it to be used either as a
feedstock and energy source in Sasol’s factories
or for
distribution to consumers, distributors and reticulators.
[5]
By its very nature, a project such as this required a large capital
investment and the taking of substantial commercial risks.
On 26
September 2001, in an attempt to minimise its exposure, Sasol
concluded a written agreement (the regulatory agreement) with
the
South African government which recorded Sasol’s investment and
the risks it was taking, as well as the government’s
commitment
to promoting the introduction of natural gas in the South African
economy ‘at the lowest cost and as fast as possible’.
The
agreement went on to provide that Sasol would be the operator of the
transmission pipeline from Mozambique, and would do so
‘at cost
plus a profit margin of 10% to compensate for operating risk’.
[6]
In addition, a schedule to the regulatory agreement provided for
charges for gas supplied to Sasol’s ‘external customers’

(defined as being customers other than Sasol and its subsidiaries) to
be subject to a price cap determined by way of reference
to prices
charged in certain European countries. Within the constraints of the
price cap, prices were to be determined by way of
‘Market Value
Pricing’ defined in the schedule as follows:
‘
(D)etermining
the gas price by comparison with:
(a)
The cost of the alternative fuel delivered to customer’s
premises or anticipated
place of use . . .; plus
(b)
The difference between all the operating costs of the customer’s
use of the
alternative fuel and all the operating costs of using
natural gas; plus
(c)
The difference between the Nett Present Value (NPV) of the capital
cost of the customer’s
continued use of the alternative fuel
and the NPV of the capital cost involving and switching to natural
gas, as would be reflected
in the customer’s accounts.’
[7]
It is common cause that only a monopolist, unrestrained by
competitors seeking to penetrate the market by way of lower prices,

in the absence of a viable substitute can exact the highest possible
price each individual customer is prepared to pay. Bearing
that in
mind, it is clear from this method of determining prices under the
regulatory agreement that Sasol was entitled to charge
a monopoly
price for the natural gas it imported from Mozambique. Subject to the
price cap, this placed consumers at its mercy
to the extent that it
could charge higher prices than would have been the case if there had
been a competitive market driving down
prices.
[8]
At the time of this agreement, Sasol Gas conducted a piped-gas
business in this country which involved the transportation,
distribution and sale of gas by means of a network of pipelines
through which hydro-carbon gases produced from coal were pumped.
It
was therefore the obvious platform of choice for Sasol to develop a
piped-gas industry using the natural gas obtained from Mozambique.

This was done either by supplying natural gas directly to its
customers, or by using it to enrich synthetic gas produced at Sasol’s

production plant at Secunda, and from there storing the enriched gas
until supplying it to its commercial customers through a pipeline

network. As the only supplier of such gas, Sasol Gas was able to
charge the monopoly price prescribed in the schedule to Sasol’s

agreement with the government. Although it serviced its own end-user
clients, Sasol Gas also supplied piped-gas to other gas distributors

who, in turn, sold it on to their clients, presumably at a price
higher than that at which they bought it.
[9]
When Sasol’s agreement with the government was concluded there
was no specific legislation in this country regulating
the piped-gas
industry. The Gas Bill had been published on 23 March 2001 but had
not yet been passed. It took until 12 February
2002 before the bill
was assented to and became the Gas Act 48 of 2001 (the
Gas Act); and
then it only came into operation on 1 November 2005.
[10]
The preamble to the
Gas Act states
its objective to be ‘(t)o
promote the orderly development of the piped gas industry; to
establish a national regulatory framework;
to establish a National
Gas Regulator as the custodian and enforcer of the national
regulatory framework . . .’ In seeking
to achieve this, the
Gas
Act introduced
the office of the Gas Regulator, defined in
s 1
of
that Act as being NERSA. Section 4(1)
(a)
of the Energy Regulator Act, in turn, bestowed the functions of the
Gas Regulator upon NERSA. In this way NERSA came to exercise

regulatory control over the natural gas Sasol was importing from
Mozambique. However, in terms of
s 36(2)
of the
Gas Act, NERSA
was
bound by the regulatory agreement for a period of 10 years from the
date natural gas was first received from Mozambique. As
a result, it
is common cause that the dispensation extended by that agreement
lasted until 25 March 2014, from which date Sasol’s
gas prices
first became subject to NERSA’s regulation.
[11]
In this way, during the ten year period preceding March 2014,
(referred to by counsel for the appellants as ‘the decade
of
grace’ – a convenient label I shall use as well) the
government allowed Sasol, through Sasol Gas, to charge monopoly

prices in order to compensate it for its investment in the Mozambican
gas fields and the pipeline from that country.
[12]
NERSA’s function to regulate gas prices is prescribed by
s 4
(g)
as read with
s 21(1)
(p)
of the
Gas Act. The
latter section provides that maximum prices for
distributors, reticulators and all classes of consumers must be
approved by the
Gas Regulator (ie NERSA) where there is ‘inadequate
competition’ as contemplated in Chapters 2 and 3 of the
Competition Act 99 of 1998
. Importantly, reg 4(3)(a) of the
Piped-gas Regulations promulgated under the
Gas Act on
20 April 2007
(the Regulations)
[1]
requires
NERSA, in considering maximum prices, to base its approval of maximum
prices ‘on a systematic methodology applicable
on a consistent
and comparable basis.’
[13]
As the approval of maximum prices is conditional upon there being
inadequate competition in the industry, I would have thought
logic
demanded that NERSA investigate the state of competition as a
necessary preliminary issue. Instead it proceeded in reverse
order,
and first set out to determine a methodology to be applied in setting
maximum prices. On 21 October 2010, it published a
consultation
document to provide a basis for discussion on the issue. After having
received representations, this was followed
in June 2011 by it
publishing a draft methodology. Thereafter, on 28 October 2011, it
approved its methodology in what it said
was its final form and, on
24 November 2011, gave its reasons for doing so.
[14]
Throughout this process, NERSA favoured a method of determining a
maximum price by having regard to the comparative cost of
a basket of
alternative fuels. In its initial consultation document of August
2010, it drew attention to some 20% of gas users
having switched from
coal and went on to state that coal, heavy fuel oil (HFO), crude oil,
distillate and liquefied petroleum gas
(LPG) might be appropriate
alternatives to use as comparable. However, it is apparent from this
document that all these alternatives
were likely be more costly than
natural gas. Indeed it suggested a formula in which the maximum price
of gas would be determined
by a basket of HFO and crude oil with
other alternatives such as coal, distillate and LPG having zero
effect.
[15]
By the time it published its draft methodology in June 2011, NERSA’s
views on the appropriateness of using a basket of
alternatives had
hardened. It stated that the maximum price of gas energy, excluding
trade margins, distribution tariffs and transmission
tariffs and
levies, would be determined by way of a formula using different
energy price indicators. As appears from the various
options it
suggested, it no longer felt that much weight needed to be given to
the price of HFO and crude oil, and coal had become
a favourite
alternative. Thus in one suggested option, it was given a weighting
of 37% whilst, in another, its weighting was increased
to 90%. Be
that as it may, stakeholders were called on to comment on its
suggestions.
[16]
Having received comments, on 28 October 2011 NERSA published its
final methodology to be used in approving maximum prices.
In the
third part of this document, it stated that the maximum 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, HFO and LPG, their respective weightings
being
apportioned at 37% for coal, 24% for diesel, 37% for electricity and
1% for both HFO and LP gas. Allowance was also made
for discounts in
respect of different categories of customers. In part 3.5 of the
methodology, after stating that it recognised
the basket of
alternatives method to be ‘appropriate under the prevailing
conditions’. NERSA went on to state:
‘
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 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 a
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. This 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.
The
pass-through approach requires a cost-based price build-up, including
at the least the cost of the procured or produced gas,
and any
transportation or regasification costs, to justify the price for gas
energy applied for. The transmission and distribution
tariffs and the
trading margin, determined in accordance with this methodology, would
be added to the maximum gas energy price.’
[17]
The ‘pass-through’ approach to which NERSA referred is
nothing more than a simple ‘cost plus percentage’
method
of determining a price. Its use is commensurate with reg 4(4) of the
Regulations which provides:
Maximum
prices referred to in sub regulation (3) must enable the licensee to─
(a)
recover all efficient and prudently incurred investment and
operational costs; and
(b)
make a profit commensurate with its risk.’
The
importance of this is that the choice of methodology to be used was
not set in stone but was left up to an applicant applying
to NERSA
for a determination of a maximum gas price, to decide upon.
[18]
One further issue arising from the methodology must be mentioned. On
1 May 2009, NERSA had published guidelines for monitoring
and
approving piped-gas transmission and storage tariffs under
s 4
(h)
of the
Gas Act. These
contemplated licensees submitting tariff
applications for approval by NERSA using one of several
methodologies. In its methodology
of 28 October 2011, NERSA stated:
‘
Several
stakeholders indicated that issues of “price” and
“tariff” were conflated in the first consultation

document . . . Moreover, the inclusion of distribution tariffs in the
maximum price was strongly opposed . . . In the final methodology
the
Energy Regulator has therefore separated the maximum price of Gas
Energy, from tariffs for transmission, distribution and storage.
The
methodology refers to the approval of the maximum price of GE, to
which the following must be added:
─
Monitored and
approved, and if necessary regulated, transmission and storage
tariffs (as contained in the Tariff Guidelines, 2009);
─
Unregulated
distribution tariffs;
─
The piped-gas levy;
and
─
The trading margin.
The
resultant sum will be the total “charges of gas”. The
Energy Regulator has noted the concerns raised about expanding
the
scope of the methodology to regulating distribution tariffs and
confirms that in line with
Gas Act, distribution
tariffs are not
subject to regulation and are considered a “pass-through”
in the final charges
.
’
[19]
In the light of this, I must immediately mention that the appellants’
review challenges the maximum price which, as indicated
in the
quotation above is a composite of both gas prices and other charges,
on the sole basis that the gas price element of the
composite charge
had been irrationally and unreasonably determined. It does not
embrace a challenge to the transmission and storage
prices.
[20]
A month or so before it had approved this final methodology, NERSA
decided to call for comment on the issue of whether there
existed
inadequate competition in the piped-gas market. After soliciting
input from various stakeholders, NERSA announced in February
2012
that, despite Sasol Gas’s contrary assertion, it had decided
that there was in fact inadequate competition in the piped-gas
market
as contemplated in Chapters 2 and 3 of the
Competition Act. In
the
reasons it gave for this decision, NERSA stated that for seven years
Sasol Gas had sustained the price of gas consistently
above a
competitive level or marginal cost. It described the effect of the
regulatory agreement 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

determination of the gas component alone, but they argued that if
they succeed in respect of the price of the gas, the composite

maximum fee must also fail. I did not understand the respondents to
disagree with this.
[26]
As mentioned at the outset, the review failed, not because of a
finding that it lacked merit, but as the court a quo decided
that
there had been an undue delay after the methodology had been
determined in October 2011 before the review was brought some
two
years later. The respondents argued in this court that the court a
quo had been correct in doing so. They also raised a further

objection to this court deciding the merits of the review, based on a
contention that the matter is now of academic interest only.
[27]
It is convenient to deal with the latter issue first. It arises out
of the maximum price determination approved by NERSA, having
applied
from the end of the decade of grace until 30 June 2017 (we were
informed from the bar that Sasol Gas had submitted a new
maximum
price application to NERSA for the period 1 July 2017 to 30 September
2018 which was currently being considered. In the
light of this, it
was argued that this court should decline to hear the appeal as the
determination until June 2017 was no longer
of any effect and the
matter had become moot.
[28]
There is of course a long standing rule of practice that this court
should not decide issues of academic interest which would
have no
practical effect – see
Legal
Aid South Africa v Magidiwana & others
2015 (2) SA 568
(SCA) para 2. In the present case, however, there
still exists a live issue between the parties. In its amended notice
of motion,
the appellants seek 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.’ In addition,

there is considerable public interest in resolving whether the basic
methodology NERSA adopted, and which it presumably intends
to utilise
again in the future, is valid. The issue is therefore one which
cannot be regarded as having no practical effect.
[29]
Turning to the issue of undue delay, the reasoning of the court quo,
supported by the respondents in this appeal, was that
s 7(1) of the
Promotion of Administrative Justice Act 3 of 2000 (PAJA) requires a
judicial review to be brought ‘without
unreasonable delay’
and not later than 180 days after the person concerned became aware
of the administrative action; that
reg 4(3) required NERSA to use a
systematic methodology in determining a maximum price application;
that after the final methodology
had been determined in October 2011
and its reasons for adopting it given on 24 November 2011, NERSA was
bound thereby and was
not free to jettison it; the appellants ought
therefore to have reviewed NERSA’s final methodology decision
within 180 days
of 24 November 2011, but had unreasonably delayed
doing so until October 2013, some two years later.
[30]
The appellants contended that the court quo had erred in this
reasoning, and argued that the determination of the methodology
was
not, in itself, an administrative action subject to review. The
question is, whether the determination of the methodology to
be used
in respect of future price applications is ‘administrative
action’, defined in part in s 1 of PAJA as being
a decision ‘.
. . which adversely affects the rights of any person and which has a
direct, external legal effect’?
[31]
In her discussion of the meaning of ‘direct, external legal
effect’, Professor Hoexter, in her seminal work
Administrative
Law in South Africa
(2 ed) at 227-228, states that the
phrase was a last-minute addition to the definition borrowed from
German Federal administrative
law, and quotes the following comment
from certain German writers regarding the position in that country:
‘
If,
for example, a decision requires several steps to be taken by
different authorities, only the last of which is directed at the

citizen, all previous steps taken within the sphere of public
administration lack direct effect, and only the last decision may
be
taken to court for review. This applies, for instance, to many
planning or licence granting processes where a sequence of procedural

decisions leads to a final decision against which a legal remedy is
available. Therefore, all the preparatory decisions are in
principle
not reviewable by the administrative courts.’
[2]
[32]
The appellants argued, correctly in my view, that whilst reg 4(3)(a)
requires NERSA to ‘be objective ie based on
a systematic
methodology applicable on a consistent and comparable basis’
when determining gas prices, it does not require
it to make what
their counsel described as ‘a freestanding upfront
determination of the methodology’ before doing so.
Accordingly
they argued, again correctly in my view, that the determination of
the methodology and the determination of the maximum
gas price form
part of the same process under
s 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 is not obliged to do so.
[33]
In the light of these considerations, the appellants argued that the
decision which had a ‘direct, external legal effect’
was
not the decision in regard to the methodology but the determination
of the maximum gas prices, and as there is no suggestion
of the
review of that decision not being timeous, the court quo reached the
wrong decision.
[34]
I find this argument compelling. Notably, it is in line with the
reasoning of the Constitutional Court in
Minister of Health &
another NO v New Clicks South Africa (Pty) Ltd & others
(Treatment Action Campaign & another as
amici curiae)
2006
(2) SA 311
(CC). In that matter the court was obliged to deal with a
review of regulations promulgated by the Minister of Health under s
22G
of the Medicines Act after having received recommendations of a
pricing committee. In his judgment, paras 136-138, Chaskalson CJ

said:
‘
The making of
the regulation . . . involves a two-stage process. First, a
recommendation by the Pricing Committee and, second a
decision by the
Minister as to whether or not to accept the recommendation. . . In
the circumstances of the present case, to view
the two stages of the
process as unrelated, separate and independent decisions, each on its
own having to be subject to PAJA, would
be to put form above
substance.
The
Minister was not obliged to act on the Pricing Committee’s
recommendations. She had a discretion whether to do so. But

ultimately there had to be one decision to which both the Pricing
Committee and the Minister agreed. Neither had the power to take
a
binding decision without the concurrence of the other. It was only if
and when agreement was reached that regulations could be
made.’
[35]
On a similar process of reasoning in the present case, the
determination of maximum gas prices was made by way of a staged

process which only became binding on its completion when NERSA gave
its decision on Sasol Gas’s application. The fact that
there
were various steps in the process does not render each of these
steps, individually, an administrative action which adversely
affects
the rights of any person. For, as Nugent JA stressed in
Grey’s
Marine Hout Bay (Pty) Ltd & others v Minister of Public Works &
others
[2005] ZASCA 43
;
2005 (6) SA 313
(SCA) para 24, administrative action in general terms
involves the conduct of the bureaucracy having ‘direct and
immediate
consequences for individuals or groups of individuals’.
NERSA’s determination of the methodology to be used did not

have consequences of that nature. It could only have had such an
impact once it had determined what Sasol Gas’s maximum prices

should be. Until then, it did not bind any party and, in my view, did
not constitute administrative action.
[36]
There are two further reasons why the determination of the
methodology cannot be regarded as administrative action which
determined
the outcome of Sasol Gas’ maximum price application.
The first is that it is apparent from the methodology itself that no

finality had actually been reached on how prices would be assessed;
the second is that, in any event, NERSA did not apply the methodology

it had decided upon in March 2011.
[37]
In regard to the first, I have already pointed out that in part 3.5
of the methodology NERSA extended a choice to a licensee
applying for
a maximum price determination to opt for either the basket of
alternatives method or the pass-through approach. It
was only when
Sasol Gas made its choice that the method it had chosen would become
‘the systematic methodology to be consistently
applied through
(its) licence period . . ..’ In the present instance, that only
occurred when Sasol Gas applied for a maximum
price determination.
Before then, the terms of the methodology were purely theoretical,
and had no effect. That is all the more
so once one remembers that,
at the time the methodology was published in October 2011, NERSA had
not even decided whether there
was inadequate competition in the
market and had, so to speak, put the cart before the horse.
[38]
The second reason flows from the reasons NERSA gave for its decision
on Sasol Gas’s maximum tariffs. It stated that the
issue of
‘revenue neutrality’ had been raised during its public
consultation process, and led to it approving a transitional

mechanism to ameliorate the effects of its decision on maxima which
would otherwise lead to industry-wide price increases. This
it did
with the specific intention of ensuring that the price restructuring
would ‘leave Sasol Gas neither better off or
worse off as in
terms of revenue earned and profitability,
ceteris
paribus’
compared to the starting point before restructuring’.
Consequently, NERSA did not apply the methodology it had earlier
decided
upon but, instead, altered it in order to achieve what it
felt was a more equitable result. Put differently, the final maximum
price determination was achieved not by consistently following its
methodology but by using a revised method in order to ensure
that
Sasol Gas suffered no financial loss. There are important
consequences which flow from this to which I shall later return.
[39]
What is apparent from the two reasons I have just mentioned, however,
is that there was no final decision having a direct external
effect
until such time as a decision was announced on Sasol Gas’s
maximum price application. The court a quo therefore erred
in not
recognising that the administrative action that fell to be reviewed
was NERSA’s decision on Sasol Gas’s application.

Consequently, it ought not to have declined to hear the matter due to
an undue delay. Rather it should have considered the merits
of the
review, to which I now turn – it having been agreed amongst the
parties that in that regard we are in as good a position
as the court
a quo to do so.
[40]
It is a fundamental requirement of administrative law that an
administrative decision must be rational. This is entrenched
in s
6(2)
(f)
(ii)
of PAJA which provides for an administrative action being reviewable
if it is not rationally connected, inter alia, to the
purpose for
which it was taken, the purpose of the empowering provision, or the
reasons given for it by the functionary who took
it. Administrative
action is also reviewable under s 6(2)
(h)
of PAJA if ‘it is one that a reasonable decision-maker could
not reach’ – see
Bato
Star Fishing v Minister of Environmental Affairs
[2004] ZACC 15
;
2004
(4) SA 490
(CC) para 44. Bearing these principles in mind, I turn to
consider whether the decision taken by NERSA passes muster.
[41]
Unfortunately, the papers in the review application became unduly
lengthy, with opinions being filed from experts who locked
horns on a
vast array of issues, many of which appear to have played no part in
NERSA’s decision, but were relied upon in
an ex post facto
attempt to either justify or condemn it. The criticism by counsel for
the appellants that the ‘expansive
attempts’ by the
experts employed by NERSA to justify its determination of maximum
prices ‘range far and wide but have
precious little to do with
the considerations that actually motivated’ the decision, is by
no means unmerited. The dust of
this conflict seems to have obscured
what was a relatively straight-forward issue that fell 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. Any further reasons are irrelevant to the
task at hand – see
National
Lotteries Board & others v South African Education and
Environment Project
2012 (4) SA 504
(SCA) paras 24-28.
[42]
In considering the rationality of NERSA’s decision, it is
necessary to bear in mind the process upon which it had embarked
in
the first place. It had set out under
s 21(1)
(p)
of
the
Gas Act to
determine a maximum competitive price for piped-gas to
replace the monopoly price being charged when the decade of grace
that Sasol
Gas had enjoyed came to an end. In the first draft of its
methodology of 21 October 2010, NERSA in fact described its mandate
as
being ‘to apply regulation in the absence of a competitive
market’ so as to ‘replicate competitive market outcomes

in approving maximum prices’. It set this task for itself in
the light of its finding of there being inadequate competition
in the
piped-case industry.
[43]
In its reasons for reaching that decision, NERSA stated that for
seven years Sasol Gas had sustained the price of gas consistently

above a competitive level or marginal cost, and described the effect
of the regulatory agreement 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 undertaken 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 the cost of an alternative energy source
available to
an individual customer
.
. . .’ (Emphasis added)
[44] In conclusion,
NERSA found:
‘
The
monopolist has market power, and as evidenced by current pricing
practices and previous complaints concerning discriminatory
and high
prices as well as challenges in accessing and/or sourcing gas supply,
it is our submission
that
market power has been exercised and misused
,’
and that
‘
.
. .
the
gas prices are higher than those charged in a situation of perfect
competition or in a competitive market
.’(Emphasis
added)
[45]
Gas prices higher than what would have been charged in a competitive
market, and the abuse by Sasol Gas of its market power,
were
therefore the evils NERSA had set out to address. NERSA itself stated
that Sasol Gas’s unduly high prices were due to
them being
referenced to the cost of alternative energy sources available to its
customers.
One
would have thought that in these circumstances, to stop the abuse of
market power and to avoid overly high prices, NERSA would
have sought
a methodology designed to lower maximum prices to those which would
have prevailed in a competitive environment –
and it would have
adopted a methodology different to that used by Sasol Gas.
[46]
Instead, and in my view irrationally, NERSA did 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 monopolist would have charged.
This was hardly a
reasonable or rational 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
between 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.
[47]
In an attempt to meet this, the respondents argued that a comparison
between the actual prices Sasol Gas had charged its customers
during
its decade of grace and its prices thereafter, showed that there had
not been a significant increase across the board and
that many of its
customers were being charged less than they had been before. However,
this loses sight of the fact that we are
not concerned with a
comparative analysis of prices actually charged and that NERSA has
not attempted to prescribe what prices
Sasol Gas should charge.
Instead it determined what prices could be charged as a competitive
maximum. And as, so to speak, ‘the
proof is in the pudding’,
the 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. As was
correctly stated in the report dated 16 September 2014 prepared
of behalf of RBB Economics
by Mr PB Smith, an expert witness relied
upon by the appellants:
‘
Despite
having kept average piped-gas prices roughly the same, Sasol Gas has
set its current prices significantly below what it
is permitted to
charge under the Methodology. This, too, highlights that the
Methodology is not effective in alleviating the effects
of a lack of
effective competition: it permits Sasol Gas to achieve significantly
higher prices (and profits) than it did when
it was an unregulated
monopolist. Clearly, this is irrational. As I say above, the aim of
price regulation in a market lacking
adequate competition is to
constrain the regulated firm’s market power.’
[48]
In summary, the fundamental error which NERSA made was to use a
basket of fuel alternatives as a reference point to determine
a
competitive price for piped-gas. The mere fact that those sources of
energy were not being used by piped-gas consumers is in
itself an
indication that they were too expensive. To then use them as the
yardstick is simply illogical. In effect, the methodology
adopted by
NERSA was one which by its very nature would determine a price for
piped-gas at which consumers would seek alternative
sources for their
requirements – in other words a monopoly price – which
was precisely the situation NERSA had set
out to avoid. In this
regard the following passage in a further report of Mr Smith dated 9
February 2015, encapsulates the difficulty
the respondents face in
this regard.
‘
.
. . (W)hat makes the choice of Sasol Gas’ comparators so
unsuitable is that they include the very alternative energy sources

that Sasol Gas, as a monopolist, has already taken into account when
increasing gas prices without regard to costs, up until the
point
allowed by these weak outside options. NERSA has defined the relevant
market as one for the supply of piped gas. This necessarily
means
that alternative energy sources are simply too expensive to be
sufficiently attractive to customers of piped gas, even if
the price
of piped gas were to rise significantly above competitive levels. As
might be expected, and as NERSA confirmed, Sasol
Gas exploited its
market power by increasing the price of piped gas to the level at
which those alternative energy sources started
to become attractive
to customers. For NERSA now to approve and apply a methodology built
upon those very same alternative energy
sources is circular and
defeats the purpose of regulation.’
[49]
Consequently, the methodology 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 obliged 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 under-cut
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.
[50]
NERSA attempted to support its determination of maximum prices by
stating that it had performed a ‘sanity check’
by looking
at gas prices being charged in various countries abroad, particularly
in Europe and had ascertained that the maximum
prices it determined
were reasonable having regard to these foreign markets. However,
charges in other countries, many of which
are substantially lower
than those determined by NERSA, can only be relevant in cases in
which the market factors which determine
those prices are similar.
Without that information, broad comparisons such as that relied upon
are of no meaningful assistance.
As is set out in a report dated 15
September 2014 prepared by The Brattle Group, experts in the
international electricity and gas
markets:
‘
Gas
prices in other parts of the world are irrelevant to determining
whether the gas price resulting from the methodology is reasonable.

In South Africa, consumers should benefit from a relatively low gas
price since they are near a large source of gas, in Mozambique.

Relatively high prices in Europe and Japan cannot justify a gas price
above the competitive level in South Africa. The markets
in Europe
and Japan are not directly accessible to gas sellers in South Africa,
and South African consumers cannot buy gas from
the United States of
America. The relevant benchmark is not the price of gas in a market
such as Japan, Europe or the US, but what
the gas price in a
competitive South African gas market would be.’
[51]
A factor of particular significance is that while internationally the
regulation of gas prices is based on the cost of acquiring
the gas
plus a reasonable mark-up, there is no evidence that the methodology
adopted by NERSA – using the cost of a basket
of alternative
fuels as a reference – has ever been adopted in any other
market. An expert report to this effect relied upon
by the appellants
was not disputed, and so it seems that the formula adopted by NERSA
is, as was described by appellants’
counsel, ‘maverick’
as no other regulated country in the world has used it. And the
reason for this would seem to me
to be clear. It truly does not, and
cannot, be used to mimic a competitive market and determine a
competitive price. Instead, it
determines a price level at which
consumers would look elsewhere for their requirements – the
hallmark of a monopoly price,
unrestrained by direct competition.
[52]
I have already mentioned NERSA’s amendment of its methodology
to ensure a period of price neutrality followed by an incremental

increase in prices. In its reasons for decision of 26 March 2013, it
stated that the introduced maximum prices were likely to lead
to
industry-wide price increases and that it had therefore included a
specific element of revenue neutrality as applied for by
Sasol Gas.
It went on to state:
‘
7.10
Hence the transitional mechanism was amended and approved as
indicated below. It must be noted that the increases
referred to are
to be calculated as the percentage increase from the customer’s
prevailing market value price as at 25 March
2014 to the
non-discriminatory actual price (that is, within the approved maximum
price as appropriate) before addition of tariffs
or the levy, that
would be applicable on 26 March 2014. The approved maximum
prices on 26 March 2014 will be those inclusive
of the escalation to
the maximum prices approved on 26 March 2013 and in accordance
with the approved escalation mechanism
from 26 March 2013.
7.10.1
Where a ≥15% increase is required of the customer’s
prevailing price as at 25 March 2014 to achieve non-discrimination,

but where such increase is ≤30% of the customer’s prevailing
price, a maximum 15% increase will be effected on 26 March
2014; the
remainder of the increase must be effected in quarterly adjustments
between 26 March 2014 and 25 March 2015. This
implies that
increases below 15% may be implemented with immediate effect on 26
March 2014. The remainder of percentage increases
up to and including
30% of the customer’s prevailing price may be implemented in
quarterly adjustments over 1 year. It must
be noted that this implies
that the quarterly adjustments will contain instalments of the
phasing in of the increase as well as
any adjustments required in
terms of the approved maximum prices escalation.
7.10.2
For increases above 30% but ≤45% of the customer’s
prevailing price as at 25 March 2014, the increases must
be effected
as follows: a maximum 15% increase will be effected on 26 March 2014;
a further 15% increase must be effected in quarterly
adjustments
between 26 March 2014 and 25 March 2015; and the remainder of the
increase must be effected in quarterly adjustments
between 26 March
2015 and 25 March 2017. This provision ensures that price
increases up to and including 45% of the customer’s
prevailing
price must be phased in over a 3-year period.
7.10.3
For increases above 45% of the customer’s prevailing price, the
increases must be effected as follows: a maximum
15% increase will be
effected on 26 March 2014; a further 15% increase must be effected in
quarterly adjustments between 26 March
2014 and 25 March 2015;
another 15% increase must be effected in quarterly adjustments
between 26 March 2015 and 25 March 2017,
and the remainder of the
required increase must be spread over an appropriate time period
subject to approval by the Energy Regulator.
7.10.4
. . .
7.10.5
Sasol Gas must demonstrate revenue neutrality between annual revenues
based on prevailing prices between 26 March 2013
to 25 March 2014 and
the forecasted revenues for the period 26 March 2014 to 25 March 2015
based on the approved Maximum Prices
as at 26 March 2014, less any
revenue foregone due to the transitional mechanism.’
[53]
It is clear from this that NERSA expected substantial increases for
consumers, including increases over 45%, but that by way
of price
restructuring Sasol gas would be neither better nor worse off in
terms of revenue for the first 12 months after the increases
in
maximum prices came into effect. Thus in applying its methodology,
NERSA recognised that it would lead to substantial price
increases,
the effects of which it sought to ameliorate to some extent. But when
one bears in mind that the object of its exercise
was to combat the
prices that it already regarded as being too high, the application of
a method that NERSA knew would lead to
the opposite result was
clearly irrational.
[54]
Indeed, applying revenue neutrality, which effectively sought to
extend Sasol Gas’s decade of grace for a period, rather
than
bring it to an end, is in itself irrational. NERSA was mentored to
ensure competitive prices, not to protect the person enjoying
the
benefit of high non-competitive prices due to its monopoly from
suffering a loss of revenue when it was obliged to charge competitive

prices.
[55]
There is one final aspect of the issue of revenue neutrality which
needs to be mentioned. In a letter of 15 August 2013, the
appellants’
attorney wrote to NERSA and asked it to clarify what revenue
neutrality entails, how NERSA intended to measure
it, what procedures
and processes would be used to monitor compliance with the
requirement and how NERSA intended to regulate it.
NERSA’s
response to this is striking. In a letter of 16 September 2013 it
stated the following:
‘
Therefore,
(NERSA) has requested Sasol Gas to define and set out the parameters
that will enable them to “
demonstrate
how this principle will be achieved under the assumption of
‘like-for-like’, ie assuming that all variables
are
constant, such as volumes, costs, taxes etc (cetenis paribus)
”.
NERSA will then review the definition and parameters set by Sasol Gas
and either refer back to Sasol Gas to amend or, if
it is deemed
acceptable, apply the definition and parameters set out.
This
is the process currently underway and (NERSA) will notify all
stakeholders of the criteria as and when it becomes available
to be
used to demonstrate revenue neutrality by Sasol Gas.’
From
this it appears that NERSA adopted a principle in its methodology
which it did not understand and which needed the party to
be
regulated and who had made an application for a price determination
to decide how it would be effected. Put more simply, it
decided to
apply a criterion which it could not define and did not understand.
The fact that this is both irrational and unreasonable
is
self-evident.
[56]
Given all the circumstances, I have not the slightest hesitation in
concluding that NERSA’s decision of 26 March 2013,
determining
maximum prices for piped-gas supplied by Sasol Gas, was wholly
irrational and unreasonable and, for that reason, ought
to have been
reviewed and set aside by the court a quo. The appeal must therefore
succeed.
[57]
In their heads of argument, counsel for the appellants suggested the
form of an order which should be substituted for that
of the court a
quo in the event of the appeal being upheld. The effect of this would
require NERSA to determine a new maximum price
to be applied with
retrospective effect during the period 26 March 2014 to 30 June 2017.
Sasol Gas argued that this might possibly
lead to it having to repay
its customers a portion of what they had been charged during that
period and that there was no reason
to impose such an obligation. The
appellants, on the other hand, argued that Sasol Gas should not be
allowed to profit without
restraint due to NERSA having failed in its
duty of lawfully exercising price control, and that consumers were
entitled to NERSA’s
protection against the unduly high prices
charged during the decade of grace. They argued that in order to
avoid consumers being
prejudiced, the order would oblige NERSA to
determine the maximum prices with retrospective effect and, thereby,
avoid an injustice.
[58]
I agree with the appellants’ argument. As the Constitutional
Court pointed out in
Allpay
Consolidated Investment Holdings (Pty) Ltd & others v Chief
Executive Officer, South African Social Security Agency
2014
(4) SA 179
(CC) para 30, the consequences of invalidity should be
corrected or reversed when they can no longer be prevented. The order
suggested
by the appellants will have such an effect and will
therefore be reflected in the order set out below. Insofar as it
refers to
the determination of maximum transmission tariffs, which
has not been impugned, it must be remembered that ultimately there
was
a composite maximum which cannot be allowed to stand.
[59]
For the above reasons, it is ordered as follows:
1
The appeal succeeds with costs, including the costs of two counsel.
2
The order of the court a quo is set aside and substituted by the
following:
‘
(a)
The decisions by the first respondent on 26 March 2013 to approve
applications by the second respondent (i)
for maximum gas prices and
for a trading margin for the period 26 March 2014 to 30 June 2017,
and (ii) for transmission tariffs
for the period 26 March 2014 to 30
June 2015, are reviewed and set aside.
(b)
Any maximum gas prices subsequently approved by the first respondent
for the second respondent shall
apply retrospectively with effect
from 26 March 2014 until the date of termination of such
approval.
(c)
The costs of this application shall be paid by the respondents
jointly and severally, the one
paying the other to be absolved
______________
L
E Leach
Judge
of Appeal
Appearances:
For
the Appellants:
W Trengove
SC (with him J J Meiring)
Instructed
by:

Norton Rose Fulbright Inc, Sandton
Phatshoane Henney
Attorneys, Bloemfontein
For
the First Respondent :
I V Maleka SC (with him H Mutenga)
Instructed
by:

Werksmans Attorneys, Sandton
Webbers,
Bloemfontein
For
the second Respondent: A Cockrell SC
(with him M D Stubbs)
Bowman Gilfillan,
Sandton
Symington & De
Kok, Bloemfontein
[1]
Published under GN R321,
Government Gazette 29792, 20 April 2007.
[2]
Rainer Pfaff & Holger
Schneider ‘The
Promotion of Administrative Justice Act from
a
German Perspective’
(2001) 17
SAJHR
59
at 72.

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