Contract analysis

I. Purpose and Scope of This Memorandum This memorandum is intended to provide the management and board of Dunmore Energy Holdings Ltd. ("Dunmore" or "DEH") and its subsidiary Dunmore Power Trading LLC ("DPT") with a comprehensive overview of the investigation process currently being conducted by the Federal Energy Regulatory Commission's ("FERC" or the "Commission") Office of Enforcement ("OE"). This memorandum has

II. Background: The FERC Investigation A. The Triggering Events The current investigation appears to have originated from two independent sources, both of which brought DPT's trading activity to the attention of FERC's Office of Enforcement. First, Velthorn Market Analytics, Inc. ("Velthorn"), which serves as the MISO Independent Market Monitor ("IMM") pursuant to MISO's tariff, submitted a referral letter to FERC OE

1. Uneconomic Day-Ahead Bidding. FERC Staff is investigating allegations that DPT submitted Day-Ahead energy offers for electricity generated by Dunmore's gas-fired generation units at prices significantly below the marginal cost of production. Specifically, it is alleged that DPT submitted offers at the Indiana Hub at prices as low as negative $15 per megawatt-hour ("MWh") to negative $40/MWh at times when the margi

2. Cross-Product Manipulation. FERC Staff is also investigating allegations that DPT took Real-Time virtual positions at the Minnesota Hub — specifically, Increment Offers ("INCs") and Decrement Bids ("DECs") — that were designed to amplify the congestion differential created by the uneconomic Day-Ahead bidding at the Indiana Hub. Virtual transactions in MISO are financial instruments that allow market participants t

3. Physical-Financial Coordination. Finally, FERC Staff is investigating allegations that DPT coordinated the timing and volume of natural gas nominations through Dunmore Midstream Partners LP ("DMP"), a Dunmore affiliate that manages pipeline transportation and gas supply for Dunmore's generation fleet. The allegation is that by coordinating gas nominations with the uneconomic generation offers, DPT was able to mask

Section 222 of the Federal Power Act (16 U.S.C. § 824v), enacted as part of the Energy Policy Act of 2005, prohibits the use or employment of any manipulative or deceptive device or contrivance in connection with the purchase or sale of electric energy or the purchase or sale of transmission services subject to the jurisdiction of the Commission. This provision was modeled on Section 10(b) of the Securities Exchange

III. Phases of a FERC Office of Enforcement Investigation The FERC enforcement investigation process is structured and multi-phased. Understanding each phase is critical to effective advocacy and resource planning. The following sections describe each phase in detail. A. Phase 1: Preliminary Inquiry A FERC enforcement investigation typically begins with the issuance of a preliminary inquiry letter from the Division o

IV. Potential Outcomes of the Investigation The FERC enforcement investigation can result in several different outcomes, ranging from a negotiated settlement to contested litigation to closure without action. Each potential outcome is described below, in order of likelihood based on Calderwood & Harkness's assessment of the current posture of the investigation. A. Outcome 1: Consent Agreement (Settlement) The most co

V. Civil Penalty Framework A. Statutory Authority

Section 316A of the Federal Power Act (16 U.S.C. § 825o-1), as amended by the Energy Policy Act of 2005, authorizes FERC to impose civil penalties for violations of Part II of the Federal Power Act, including Section 222 (the anti-manipulation provision). The maximum civil penalty is approximately $1.5 million per violation per day, as adjusted periodically for inflation pursuant to the Federal Civil Penalties Inflat

VI. Confidentiality and Non-Public Nature of the Investigation A. Statutory and Regulatory Confidentiality Protections FERC enforcement investigations conducted under 18 C.F.R. Part 1b are non-public proceedings. The existence and substance of the investigation are confidential from the date of the preliminary inquiry letter through the conclusion of the investigation, unless and until the Commission issues a public

Section 1b.9 of the Commission's regulations specifically prohibits FERC Staff from publicly disclosing information obtained during the course of a non-public investigation, except as authorized by the Commission or as otherwise required by law. This prohibition extends to the existence of the investigation itself, the identity of the subject, the nature of the allegations, and any documentary or testimonial evidence

VII. Dunmore's Prior Counsel Conflict As the Dunmore leadership team is aware, Dunmore's prior outside counsel for FERC regulatory matters, Aldercroft & Beane LLP ("Aldercroft & Beane"), a Washington, D.C.-based firm, is unable to represent Dunmore in this enforcement proceeding. The conflict arises from Aldercroft & Beane's concurrent representation of another MISO market participant that is also the subject of a FE

VIII. Mitigating Factors and Preliminary Strategic Considerations While it is too early in the investigation to develop a comprehensive defense strategy, Calderwood & Harkness has identified several potential mitigating factors and strategic considerations that may be relevant to the ultimate resolution of this matter. Pre-Existing Compliance Efforts. Dunmore took several affirmative steps to strengthen its complianc