Industrial Gas Users Association of SA v National Energy Regulator of SA and Another (63670/2021) [2024] ZAGPPHC 550 (18 June 2024)

REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG DIVISION, PRETORIA

CASE Number: 63670/2021

1. Reportable: Yes/No

2. Of interest to other judges: No

3. Revised: No

In the matter between: -

INDUSTRIAL GAS USERS ASSOCIATION OF SA

Applicant

and

NATIONAL ENERGY REGULATOR OF SA

First Respondent

SASOL GAS LIMITED

Second Respondent

JUDGMENT

This Judgment was handed down electronically by circulation to the parties’ and or parties representatives by email and by being uploaded to CaseLines.

The date of the handing down of this judgment shall be deemed to be the date on which it is distributed to the parties.

Introduction

[1] The applicant is the Industrial Gas Users Association of South Africa (“IGUA- SA”), a body corporate whose members are large industrial users of gas. IGUA-SA states that its central purpose is to ensure the efficient availability of hydrocarbon gas in Southern Africa to meet significant and growing demand, both by organisations requiring more gas to expand the operations and by those intending to switch to gas from alternative energy sources that are more costly than gas and/or are more harmful to the environment.

[2] The first respondent is the National Energy Regulator of South Africa (“NERSA”).

[2.1] NERSA is established by section 3 of the National Energy Regulator Act, Act 40 of 2004 (“the NERSA Act”);

[2.2] NERSA is mandated in terms of the NERSA Act to regulate the electricity, piped gas and petroleum pipelines industries in terms of the Electricity Regulations Act, 2006[1], the Gas Act, 2001[2] and the Petroleum Pipeline Act, 2003[3], respectively;

[2.3] Specifically in terms of section 4 of the Gas Act, NERSA must, inter alia:

“(g) Regulate prices in terms of section 21(1)(p) in the prescribed manner”.

[3] The second respondent is SASOL GAS LTD (“Sasol”). Sasol is a recognised monopolist in the piped-gas industry.

The nature of the relief sought

[4] IGUA-SA approached this court for the review and setting aside of a decision made by the first respondent (dated 31 March 2021, but published on 8 July 2021, referred to as the “2021 decision”), to approve Sasol’s maximum gas prices for the period from March 2014 to June 2023.

[5] IGUA-SA contends that the methodology adopted by NERSA to determine the maximum gas prices is unreasonable and irrational.

[6] IGUA-SA seeks the following specific orders:

“1.1 [that] the first respondent‘s decision, dated 31 March 2021 but published on 8 July 2021, to approve the second respondent’s maximum gas prices for the period from March 2014 to June 2023, is reviewed, declared unlawful and set aside.

1.2 [that] the matter is remitted to the first respondent to take a new decision.

1.3 [that] the first respondent must determine the second respondent’s maximum prices by the cost-build-up or cost-plus method which allows

the second respondent to recover its prudently incurred costs and a return commensurate with risk, but no more.

1.4. The first respondent, and the second respondent if it opposed this application, are ordered to pay the applicant’s costs.”

[7] The following main issues are therefore to be determined:

[7.1] Whether the 2021 decision is unlawful and stands to be set aside. It is not in dispute that, if I decide the 2021 decision was unlawful, it ought to be remitted to NERSA;

[7.2] Whether, if I decide to set aside the 2021 decision and remit it to NERSA, I should direct that it apply a specific method in determining piped gas prices.

Legislative framework

[8] During the late 1990s, Sasol embarked on the “Sasol Natural Gas Project”, in which it pioneered the development and commercial supply of natural gas from gas fields in Mozambique to the Southern African market via an 865km pipeline. The commercial supply of natural gas to South Africa commenced in March 2004.

[9] Sasol entered into an agreement with the Government of South Africa, the Mozambican Gas Pipeline Agreement of 2001, in terms of which Sasol was permitted to charge customers based on the cost to the customer of switching from gas to an alternative fuel. That regime endured for 10 years after gas first landed in South African under that agreement, which, as stated, occurred in 2004. It therefore ended on 25 March 2014.

[10] When the Mozambique Pipeline Agreement came to an end, Sasol’s maximum price for piped gas came to be regulated by the Gas Act, 48 of 2001 (“the Gas Act”) read with Regulation 4 of the Piped-Gas Regulations.

[11] Section 2 of the Gas Act set out the objects of that Act, being:

“2. Objects of Act.—The objects of this Act are to—

(a) promote the efficient, effective, sustainable and orderly development and operation of gas transmission, storage, distribution, liquefaction and re-gasification facilities and the provision of efficient, effective and sustainable gas transmission, storage, distribution, liquefaction, re- gasification and trading services;

(b) facilitate investment in the gas industry;

(c) ensure the safe, efficient, economic and environmentally responsible transmission, distribution, storage, liquefaction and re-gasification of gas;

(d) promote companies in the gas industry that are owned or controlled by historically disadvantaged South Africans by means of licence conditions so as to enable them to become competitive;

(e) 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;

(f) promote skills among employees in the gas industry;

(g) promote employment equity in the gas industry;

(h) promote the development of competitive markets for gas and gas services;

(i) facilitate gas trade between the Republic and other countries; and

(j) promote access to gas in an affordable and safe manner.”

[12] Section 3 of the Gas Act established the National Gas Regulator (the “Gas Regulator”), whose functions are set out in section 4 thereof. In particular, it is the function of the Gas Regulator to “regulate prices in terms of section 21(1)(p) in the prescribed manner.”

[13] In terms of section 4(1)(a) of the NERSA Act, NERSA must undertake the functions of the Gas Regulator as set out in section 4 of the Gas Act.>

[14] In terms of section 15 of the Gas Act, no person may without a license issued by the Gas Regulator:

“15. Activities requiring licence.—(1) No person may without a licence issued by the Gas Regulator—

(a) construct gas transmission, storage, distribution, liquefaction and re-gasification facilities or convert infrastructure into such facilities;

(b) operate gas transmission, storage, distribution, liquefaction or re- gasification facilities; or

(c) trade in gas.”

[15] Section 21(1) provides the framework of requirements and limitations within which the Gas Regulator may impose license conditions. Of particular relevance to the present matter is section 21(1)(p) which provides:

“Maximum prices for distributors, reticulators and all classes of consumers must be approved by the Gas Regulator where there is inadequate competition as contemplated in Chapters 2 and 3 of the Competition Act, 1998 (Act no 89 of 1998)”

[16] As stated, it is not in dispute that Sasol has a monopoly in the piped gas industry and that therefore, the determination of maximum prices is subject to section 21(1)(p).

[17] On 20 April 2007, the Minister of Minerals and Energy promulgated regulations in terms of section 34(1) of the Gas Act, referred to herein as the “Piped Gas Regulations”.

[18] Subregulation 4(3) of the Piped Gas Regulations provides as follows:

“(3) The Gas Regulator must, when 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.”

[19] Subregulation 4(4) provides as follows:

“(4) Maximum prices referred to in subregulation (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.”

[20] It is in this legislative framework that NERSA’s 2021 decision should be considered.

The history leading up to this application

[21] There is some history to this matter, which I will briefly set out below.

[22] In October 2011, NERSA published a methodology to approve maximum prices of piped-gas in South Africa which provides for two approaches by which to approve maximum gas prices, being:

[22.1] A pass-through (or costs-plus) approach; or

[22.2] A basket of alternative approach.

This is referred to for purposes of this judgment as the “first methodology”.

[23] As stated, the first methodology permitted Sasol to choose between a pass- through or cost-plus approach and one based on a basket-of-alternative fuel prices.

[23.1] The cost-plus approach is a price based on Sasol’s costs plus a reasonable return;

[23.2] The basket-of-alternative fuel prices approach is based on the weighted average price of a basket-of-alternative fuels, namely coal, diesel, electricity, heavy fuel oil and liquified petroleum gas.

[24] Sasol opted for the basket-of-alternatives approach.

[25] On 23 December 2012, Sasol submitted an application to NERSA to approve its transmissions tariffs for the period 25 March 2014 to 30 June 2015, which were approved by NERSA on 26 March 2013.

[26] Also on 23 December 2012, Sasol submitted an application to NERSA in which it sought approval of maximum gas prices for the period 25 March 2014 to 30 June 2017 and approval of a trading margin for the period 25 March 2014 to 30 June 2015.

[27] On 26 March 2013, NERSA made a decision:

[27.1] Approving an overall maximum gas energy price of R117.69/Giga Joule (“GJ”) as at 23 March 2013;

[27.2] Approving a trading margin of R8.1/GJ for the period 25 March 2014 to 30 June 2014 and R10.40/GJ for the period 1 July 2014 to 30

June 2017; and

[27.3] Giving approval for various distinguishing features in terms of section 22 of the Gas Act.

(a) Negative impact on third-party traders and their customers

(b) Negative impact on Sasol Gas’ large external end- user customers.”

(d) “Sasol Gas’ unform pricing policy and its abandonment of volume-based discounts to its various classes of customers mean that the prices at which Sasol Gas sells gas to third-party traders will increase in value…”

(e) “This will have significant negative impact on third-party traders, their end-user customers, as well as competition in the relevant markets in which both third-party traders and their end- user customers operate. In particular, it will:

· Remove an important competitive constraint on third-party traders; and

· Squeeze the margins of third-party traders and their end- user customers.”

(f) “4.1 NERSA has identified the following potential ways in which Sasol Gas’ uniform pricing approach may contravene the provisions of the Gas Act:

[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 imagine how Nersa could decide how to equitably split the surplus without considering Sasol's profits and thus costs. Under the basket-of-alternatives approach, Nersa has no way of calculating Sasol's profit from any given price, and therefore has no way of adequately judging the equities of distribution of the surplus.

[75] Nersa was tasked with setting a ceiling price for Sasol that allowed it to recover its costs and to make a profit that was commensurate with its undertaken risks, as set out in reg 4(4). In order for Nersa to rationally decide the maximum price which would include both costs and the chosen allowable profit, it needed to know and consider Sasol's marginal costs of production.”

[77] Instead of considering Sasol's costs, Nersa considered the imaginary marginal costs of production for an admittedly unknown gas seller. The basket-of-alternatives option of the Maximum Pricing Methodology 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 istotally 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 trying 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 substitutes. 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 could 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.”

[72] Again, these statements are made , in my view, in the context of the Constitutional Court’s criticism of NERSA’s failure to have regard to Sasol’s actual costs in deciding on a methodology to determine maximum gas prices.

[73] I do not interpret the Constitutional Court’s decision to have laid down the specific (and only) to be applied by NERSA in the fulfilment of its statutory duties. I have no doubt that, had the Constitutional Court intended to make such a far-reaching decision, it would have stated it, at least as part of its order of remit to NERSA, but also in absolute clear terms as part of its reasoning.

[74] I find that IGUA-SA is not entitled to an order directing the methodology NERSA should follow in determining maximum gas prices.

[75] Finally, Sasol has indicated that, in the event of the 2021 decision being reviewed and set aside, that such an order must only be made prospectively.

[76] Sasol relies as a basis for this contention, on the fact that it had refunded its customers approximately 1.7 billion as a result of the setting aside of the 2013 and 2017 decisions and, through this, demonstrated its bona fides. It claims that the retrospective adjustments of the previous decisions caused great prejudice to its business operations.

[77] In circumstances where I have found that the 2021 decision was unlawful, I am not open to enforcing this decision in any way.

ORDER

For these reasons the following order is hereby made:

[1] NERSA’s decision dated 31 March 2021 and published on 8 July 2021, to approve Sasol’s maximum gas prices for the period from March 2014 to June 2023 is declared unlawful and set aside;

[2] The matter is remitted to NERSA to take a new decision;

[3] NERSA and Sasol are directed to pay the applicant’s costs of the application.

I JOUBERT

ACTING JUDGE OF THE HIGH COURT

Date of hearing:

30 and 31 May 2023.

Date of judgment:

18 June 2024.

Appearance

On behalf of the Applicants

W TRENGOVE SC, K HOFMEYER SC,

L PHALADI

Instructed by

Norton Rose Fullbright South Africa Inc

On behalf of the First Respondent P ELLIS SC, T CHAVALALA Instructed by DM 5 Incorporated

On behalf of the Second Respondent A COCKRELL SC, A FRIEDMAN Instructed by

Bowmans Inc

[1] Act No. 4 of 2006.

[2] Act No. 48 of 2001.

[3] Act No. 60 of 2003.

[4] 2020 (1) SA 450 (CC).

[5] 2013 (1) SA 248 (CC).

[6] Affordable Medicines Trust and others v Minister of Health and Others 2006 (3) SA 247 (CC) at para 78; Albutt v Centre for the Study of Violence and Reconciliation, and Others 2010 (3) SA 293 (CC) at para 51; Democratic Alliance v President of the Republic of South Africa 2013 (1) SA 248 (CC) at para 32.

[7] Calibre Clinical Consultants (Pty) Ltd v National Bargaining Council for the Road Freight Industry 2010 (5) SA 457 (SCA) at para 58.

[8] Minister of Home Affairs v Scalabrini Centre 2013 (6) SA 421 (SCA) at para 65.

[9] 2004 (4) SA 490 (CC).

[10] 2010 (5) SA 457 (SCA) at para 59.