National Energy Regulator of South Africa and Another v PG Group (Pty) Limited and Others

NERSA is mandated under the Gas Act to regulate gas prices where there is inadequate competition. Sasol Gas (Pty) Ltd held a monopoly in the South African piped-gas market and charged prices based on "market value pricing" under the Mozambican Gas Pipeline Agreement, which allowed it to price gas just below each customer's cost of switching to alternative fuels. This regime ended on 25 March 2014. NERSA determined there was inadequate competition and Sasol applied for approval of maximum gas prices and transmission tariffs. NERSA approved Sasol's applications on 26 March 2013 using a "basket of alternatives" methodology that referenced prices of coal, diesel, electricity, HFO and LPG. The respondents, large-scale gas consumers, were aggrieved because the approved prices resulted in substantial price increases. They sought judicial review of NERSA's Maximum Price Decision and Tariff Decision on grounds of irrationality and unreasonableness under PAJA.

• Whether the Maximum Pricing Methodology constituted reviewable administrative action that had to be challenged within 180 days
• Whether the Maximum Price Decision could be reviewed independently of the Maximum Pricing Methodology
• Whether NERSA's Maximum Price Decision was irrational under section 6(2)(f)(ii) of PAJA
• Whether NERSA's failure to consider Sasol's marginal costs in determining maximum prices rendered the decision irrational
• Whether the Tariff Decision was dependent on the validity of the Maximum Price Decision and should be set aside

1. Leave to appeal granted. 2. Appeal upheld in part insofar as it relates to setting aside the Tariff Decision. 3. Remainder of appeal dismissed. 4. The Supreme Court of Appeal's order setting aside NERSA's Maximum Price Decision of 26 March 2013 (for the period 26 March 2014 to 30 June 2017) is confirmed, but the order setting aside the Tariff Decision is reversed. 5. The applicants (NERSA and Sasol) must pay the respondents' costs including two counsel.

The binding legal principles are: (1) A methodology and a substantive decision applying that methodology constitute separate administrative actions capable of independent review under PAJA, even where the methodology influences the decision. (2) Under PAJA section 6(2)(f)(ii), rationality review encompasses both the substantive decision and the process leading to it - procedural irrationality can evidence a missing or faulty rational connection between means and ends. (3) When regulating maximum prices for a recognized monopolist under legislation requiring fairness (Gas Act section 2(e), regulation 4(3)(b)) and enabling cost recovery plus reasonable profit (regulation 4(4)), the regulator must consider the monopolist's actual marginal costs and profits as a mandatory relevant factor. (4) Without considering the regulated monopolist's costs, a regulator cannot rationally: (a) equitably divide economic surplus between producer and consumers; (b) determine whether maximum prices address monopolistic market power; or (c) ensure prices enable cost recovery plus risk-commensurate profit. (5) A decision-maker retains discretion not to rigidly apply its own methodology if application would lead to irrational or unlawful results. (6) Where decisions are made using independent methodologies and factors, setting aside one decision does not automatically invalidate the other.

The Court made several non-binding observations: (1) Whether a methodology like the Maximum Pricing Methodology constitutes administrative action under PAJA is left open for future determination. (2) The basket of alternatives approach may in theory be a rational proxy for the upper bound of a competitive supply-constrained market, but without reference to the monopolist's actual costs, it cannot be tested for rationality. (3) Comparing average prices before and after a maximum price decision is comparing "apples to oranges" and may not conclusively establish irrationality, as maximum prices are ceiling limitations while actual prices are affected by multiple market factors including exchange rates and inflation. (4) Economic expert reports explaining the rationale of reasons provided prior to decision-making may be considered and are not necessarily impermissible ex post facto justifications, particularly where economics is a specialist field. (5) Courts should be cautious about deciding cases on grounds of procedural rationality where this was not pleaded or argued by the parties, and parties should be given opportunity to address such issues if raised mero motu. The concurring judgment noted that rationality of process has only been recognized for executive decisions not subject to PAJA, and PAJA separates grounds of review for process (section 6(2)(e)) from grounds relating to decisions themselves (section 6(2)(f)).

This judgment is significant for establishing important principles regarding administrative law review under PAJA in South Africa, particularly in the regulatory context. It clarifies that: (1) methodologies and substantive decisions applying them can be separate reviewable administrative actions; (2) rationality review under PAJA includes assessment of process, not just final outcomes - procedural irrationality that evidences a faulty link between means and ends can render a decision irrational; (3) when regulating a recognized monopolist, consideration of the regulated entity's actual costs and profits is a mandatory relevant factor for rational decision-making, particularly where legislation requires fairness and equitable treatment of all parties; (4) a regulator cannot avoid considering a monopolist's costs by invoking imaginary market conditions; (5) the default remedy for invalid administrative action is setting aside and remittal, not allowing invalid decisions to stand due to inconvenience. The case demonstrates robust judicial oversight of economic regulation while respecting regulatory expertise and discretion in methodology selection.