ZACC 28
Date of Hearing: 26 February 2019
Judgement Date:15 July 2019
Post Judgment Media Summary
The following explanatory note is provided to assist the media in reporting this case and is not binding on the Constitutional Court or any member of the Court.
On 15 July 2019 at 10h00, the Constitutional Court handed down judgment in an application for leave to appeal against the judgment and order of the Supreme Court of Appeal, which set aside the decision of the first applicant, the National Energy Regulator of South Africa (NERSA), to approve the maximum gas price and transmission tariff applications by the second applicant, Sasol Gas Limited (Sasol).
On 29 November 2012, NERSA made a determination that there was inadequate competition in the gas market due to Sasol’s monopoly in the market. Seeking to remedy this, on 26 March 2013, NERSA approved applications from Sasol for the determination of its maximum gas prices (Maximum Price Decision) and for the determination of its transmission tariffs (Tariff Decision). As a result, the respondents experienced a substantial increase in the prices they had been paying after the newly approved maximum prices came into effect. Aggrieved by this, the respondents applied to the High Court of South Africa, Gauteng Division, Pretoria (High Court) to review and set aside NERSA’s maximum gas price and tariff decisions on the basis that both decisions were irrational and unreasonable.
The High Court held that the decision by NERSA to adopt the methodology used to determine maximum prices fell within the ambit of section 7 of the Promotion of Administrative Justice Act (PAJA), and because the review application was brought outside of the 180-day limit set by PAJA, it was out of time and thus did not consider the merits.
On appeal, the Supreme Court of Appeal overturned the order of the High Court and substituted it with an order reviewing and setting aside the Maximum Price Decision and the Tariff Decision. The Supreme Court of Appeal held that the High Court had erred in not recognising that the administrative action which fell to be reviewed was NERSA’s decision on Sasol’s applications and not the underlying methodology. Accordingly, the review was deemed to be within time. The Supreme Court of Appeal concluded that because of, amongst others, the substantial increase in price, NERSA’s Maximum Price Decision was irrational and unreasonable and fell to be set aside. As the Supreme Court of Appeal considered the Tariff Decision to be inextricably linked with the Maximum Price Decision, the Tariff Decision was also set aside.
NERSA and Sasol appealed the Supreme Court of Appeal judgment and order to the Constitutional Court. Khampepe J penned the majority judgment and held that the Maximum Price Decision is a separate and independent administrative action from the methodology in terms of PAJA and, because of this, the review application was within the time period set out in PAJA.
The majority judgment held that determining rationality, whether under PAJA or not, must include some evaluation of the process by which a decision was made - in other words, the process leading to a decision (or the means) must be rationally related to the ends.
In determining the rationality of the Maximum Price Decision, the majority judgment held that it was incorrect for the Supreme Court of Appeal to merely compare the prices before and after the decision. The correct determination is whether NERSA’s process was a rational or reasonable way to regulate the prices of a monopolist. By not considering the marginal costs of a monopolist, a regulator cannot set a maximum price which addresses the ills of monopolistic market power. Accordingly, the Constitutional Court found that because NERSA failed to consider this mandatory input, its decision on Sasol’s maximum prices was irrational and must be set aside.
With regards to the Tariff Decision, the Constitutional Court held that the Tariff Decision was independent from the Maximum Price Decision. Therefore, the Constitutional Court held that the appeal must be upheld as far as it relates to the Tariff Decision. The majority of the Constitutional Court dismissed the appeal in part with costs.
In a separate concurring judgment, Jafta J held that the pleaded case of rationality was directed at the impugned decisions, and not the process leading up to those decisions. Jafta J reasoned that under PAJA, rationality as a ground of review is limited to an administrative action, but it is not mentioned in respect of process. Jafta J further reasoned that the inapplicability of rationality of process and the failure to establish it herein do not mean that the Maximum Price Decision was rational. According to Jafta J, it is apparent that a rational connection between the Maximum Price Decision (the means) and the competitive prices (the end), does not exist. Therefore, irrationality has been established.
The Full judgment here