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

Seven appellants, all large-scale consumers of piped-gas, challenged a decision by NERSA (National Energy Regulator of South Africa) made on 26 March 2013 approving maximum gas prices for Sasol Gas Limited for the period 26 March 2014 to 30 June 2017. Sasol Gas enjoyed a monopoly in supplying piped-gas in South Africa. Prior to NERSA's regulatory involvement, Sasol had concluded a regulatory agreement with government (26 September 2001) allowing it to charge monopoly prices determined by reference to alternative fuel costs for a 10-year period (the "decade of grace") ending 25 March 2014. NERSA found inadequate competition in the piped-gas market in February 2012 and had earlier (October 2011) determined a methodology for setting maximum prices using a basket of alternative fuels (coal, diesel, electricity, HFO, LPG). When Sasol Gas applied for maximum price determination in December 2012, NERSA approved prices substantially higher than those previously charged, despite having concluded that Sasol's previous monopoly prices were too high and constituted market power abuse. The appellants sought to review this decision as irrational and unreasonable. The High Court dismissed the application on grounds of unreasonable delay, finding that the appellants should have challenged the methodology determination in October 2011 within 180 days.

• Whether the determination of a methodology for regulating gas prices under section 21(1)(p) of the Gas Act 48 of 2001 constitutes administrative action subject to judicial review
• Whether there was unreasonable delay in bringing the review application under section 7(1) of PAJA
• Whether NERSA's decision to approve maximum gas prices that resulted in substantial increases was rational and reasonable
• Whether NERSA's methodology using a basket of alternative fuel costs to set maximum competitive gas prices was rational
• Whether the principle of 'revenue neutrality' applied by NERSA was rational and reasonable

The appeal succeeded with costs including costs of two counsel. The court a quo's order was set aside and substituted with an order: (a) reviewing and setting aside NERSA's decisions of 26 March 2013 approving maximum gas prices, trading margins and transmission tariffs for Sasol Gas; (b) requiring that any maximum gas prices subsequently approved by NERSA for Sasol Gas apply retrospectively from 26 March 2014 until termination of such approval; (c) ordering the respondents to pay costs jointly and severally.

The binding legal principles established are: (1) A preliminary determination of methodology in a multi-stage administrative process does not constitute administrative action with direct external legal effect where it does not bind parties and requires further steps before affecting rights - only the final decision in the process constitutes reviewable administrative action (applying New Clicks principles). (2) Administrative action must be rationally connected to the purpose for which it was taken - a decision by an economic regulator to adopt a pricing methodology that produces results directly contrary to the stated regulatory purpose (setting competitive prices to replace monopoly prices) is irrational and reviewable under PAJA section 6(2)(f)(ii) and (h). (3) A methodology for determining competitive prices that uses as benchmarks the very alternative fuel costs that enabled monopoly pricing cannot rationally produce competitive prices and is inherently irrational. (4) Where a regulator adopts a principle (such as revenue neutrality) that it admittedly does not understand and requires the regulated party to define, this is irrational and unreasonable. (5) Reasons given by a decision-maker ex post facto to justify a decision are irrelevant to rationality review - only the reasons that actually motivated the decision are relevant. (6) Courts may order retrospective application of corrected administrative decisions to remedy consequences of invalid decisions and prevent injustice.

The Court made several non-binding observations: (1) It would have been more logical for NERSA to investigate the state of competition as a preliminary issue before determining a pricing methodology, rather than proceeding in reverse order. (2) The Court noted that Sasol Gas's monopoly position and the regulatory agreement allowing monopoly pricing for ten years represented significant commercial risks compensated by allowing high returns - this context made the subsequent price increases even more unreasonable. (3) The Court observed that NERSA's 'sanity check' comparing prices to European and other international markets was of no meaningful assistance without understanding whether market factors were similar - mere broad comparisons are insufficient justification. (4) The Court noted with apparent disapproval that the expert evidence filed became unduly lengthy with ex post facto attempts to justify or condemn the decision on grounds unrelated to NERSA's actual reasoning. (5) The Court commented that the methodology NERSA adopted appeared to be 'maverick' as no other regulated country uses a basket of alternative fuels approach - internationally, gas price regulation is based on cost-plus reasonable mark-up. (6) The Court suggested that the Gas Act's requirement of 'inadequate competition' as a precondition for price regulation should logically be investigated before embarking on methodology determination.

This case establishes important principles regarding administrative action in the context of economic regulation. It clarifies that preliminary or procedural steps in a multi-stage administrative process (such as methodology determination) do not constitute reviewable administrative action with direct external legal effect - only the final decision affecting rights does. The judgment provides significant guidance on rationality review under PAJA section 6(2)(f)(ii) and (h), particularly in the context of economic regulation. It establishes that a regulator's decision must be rationally connected not only to the empowering legislation but to the purpose the regulator itself has articulated. The case demonstrates that adopting a methodology that produces results contradictory to the stated regulatory purpose (here, using alternative fuel costs to set 'competitive' prices when those alternatives are by definition non-competitive) is irrational. The judgment also affirms that courts will scrutinize the substance of regulatory decisions and will not allow regulators to protect monopoly profits under the guise of price regulation. It establishes that consequences of invalid administrative action should be corrected retrospectively where possible to prevent injustice. The case is particularly significant in South African energy regulation and demonstrates judicial willingness to intervene in complex economic regulatory decisions where fundamental rationality is absent.