Contract analysis

I. Executive Summary On December 18, 2023, FERC Staff—through Christine Pham, Senior Attorney in the Division of Investigations within the Office of Enforcement—transmitted a revised settlement offer in Docket No. IN23-7-000. The revised offer proposes a total monetary resolution of $11.7 million, comprising an $8.5 million civil penalty and $3.2 million in disgorgement of alleged unjust profits. The offer was transm

II. Background and Procedural Context A. Investigation Summary The Federal Energy Regulatory Commission's Office of Enforcement ("OE") initiated a formal, non-public investigation of Dunmore Power Trading LLC ("DPT"), a wholly owned subsidiary of DEH, by formal order of investigation dated June 12, 2023, issued pursuant to 18 C.F.R. Part 1b. The investigation was assigned to the Division of Investigations and is led

1. Uneconomic Day-Ahead Bidding. Staff alleges that DPT submitted approximately 2,840 GWh in negative Day-Ahead energy offers at the Indiana Hub during the Relevant Period, with offer prices as low as negative $15/MWh to negative $40/MWh. Staff contends these offers were uneconomic—that is, below DPT's variable cost of generation—and were submitted for the purpose of artificially depressing Locational Marginal Prices

2. Cross-Product Manipulation via Virtual Transactions. Staff alleges that DPT simultaneously submitted approximately 1,620 GWh in virtual transactions (increment offers and decrement bids) at the Minnesota Hub during the Relevant Period, strategically positioned to benefit from the congestion differentials allegedly created by DPT's uneconomic Day-Ahead offers at the Indiana Hub. Staff contends that these virtual tr

3. Physical-Financial Coordination with Gas Nominations. Staff further alleges that DPT coordinated its energy market bidding with natural gas pipeline nominations made by Dunmore Midstream Partners LP ("DMP"), an affiliated entity within the DEH corporate family, to support the manipulative scheme. Specifically, Staff contends that DMP's nominations on the Horizon Gas Pipeline (which serves the Hendricks County faci

III. Detailed Analysis of the Revised Offer A. Penalty Component: $8.5 Million

1. Reduction from Initial Demand FERC Staff's initial penalty demand, as set forth in the October 2, 2023 Preliminary Findings letter, was $18 million. Staff calculated this figure under the FERC Penalty Guidelines as a base penalty of approximately $9 million, which was then doubled to account for the alleged duration and geographic scope of the manipulative scheme (spanning 14 months across two MISO pricing hubs).

2. Implicit Methodology Assessment FERC Staff's revised offer letter does not provide a detailed explanation of the methodology underlying the $8.5 million figure. However, based on our understanding of the Penalty Guidelines framework, the $8.5 million figure implies one of two adjustments by Staff, or a combination thereof: (a) Reduction of the Duration/Scope Multiplier. Staff may have reduced or eliminated the 2x

3. Comparison to FERC Penalty Guidelines Factors The FERC Penalty Guidelines identify a number of factors that may increase or decrease a base penalty. Dunmore's position with respect to the key mitigating factors is exceptionally strong: (i) Cooperation. Dunmore has provided full and timely cooperation throughout the investigation, including three comprehensive document productions totaling 187,000 documents from 11

4. Assessment. The $8.5 million penalty remains approximately $3.5 million to $5.5 million above Dunmore's target range of $3 million to $5 million. While the 52.8% reduction from the initial demand is meaningful, significant room for further reduction exists given the strength of the mitigating factors outlined above and the substantive weaknesses in FERC Staff's case on the merits, as discussed in Section V below.

1. Reduction from Initial Demand FERC Staff initially sought $12.8 million in disgorgement of alleged unjust profits derived from DPT's trading activity during the Relevant Period. The revised offer of $3.2 million in disgorgement represents a 75% reduction from Staff's initial demand—a far more dramatic reduction than the 52.8% reduction in the penalty component.

2. Significance of the Reduction The magnitude of this reduction is of particular strategic significance. A 75% reduction in the disgorgement component effectively concedes that Dr. Whitfield's expert analysis rebutting Staff's unjust profits calculation had substantial merit. As noted above, Dr. Whitfield's report concluded that the actual market impact of DPT's trading was no more than $2.1 million, and that the co

3. Staff's Apparent Revised Methodology While Staff's revised offer letter does not explain the derivation of the $3.2 million figure, the number appears to reflect a revised calculation that partially credits Dr. Whitfield's transmission outage analysis while retaining some measure of attributed market impact above Dr. Whitfield's $2.1 million estimate. Specifically, the $3.2 million figure is approximately $1.1 mil

4. Continuing Vulnerability of Disgorgement Claim Even at the reduced $3.2 million level, the disgorgement figure remains speculative and cannot be quantified with the certainty required for a just resolution. The key weaknesses in Staff's disgorgement calculation include: (a) Flawed "But For" Counterfactual Model. FERC Staff's Dr. Samuel Breck relied on a "but for" counterfactual model that assumes all congestion di

5. Recommendation. We recommend that Dunmore continue to argue for zero disgorgement in the counter-proposal. The 75% reduction from $12.8 million to $3.2 million demonstrates that Staff is not confident in this component of its case. The speculative nature of the calculation, the fundamental methodological weaknesses in Dr. Breck's "but for" model, and the strength of Dr. Whitfield's rebuttal provide compelling grou

IV. Gap Analysis: Revised Offer vs. Dunmore Target Range A. Monetary Comparison Table The following table summarizes the monetary terms at each stage of the negotiation and the gap between FERC Staff's revised offer and Dunmore's target range: Key Gaps: • Gap between the revised offer ($11.7M) and Dunmore's target midpoint ($4.0M): $7.7 million • Gap between the revised offer ($11.7M) and Dunmore's target ceiling ($5

V. Assessment of Litigation Risk and BATNA A. Risks if Matter Proceeds to ALJ Hearing If settlement negotiations fail, FERC Staff could issue a show cause order pursuant to Section 31(d)(3) of the Federal Power Act, 16 U.S.C. § 823b(d)(3), initiating public proceedings before a FERC Administrative Law Judge ("ALJ"). Each party faces distinct risks in the event of contested proceedings.

1. Risks to Dunmore The risks to Dunmore in the event of an ALJ proceeding are significant and should be carefully weighed against the cost of a negotiated resolution: (a) Higher Penalty Exposure. An ALJ is not bound by the terms of any prior settlement discussions and could, in theory, impose a penalty up to the statutory maximum under Section 316A of the Federal Power Act, 16 U.S.C. § 825o-1, which currently provid

2. Risks to FERC Staff FERC Staff also faces meaningful risks in the event of contested proceedings, and these risks should be leveraged in settlement negotiations: (a) Burden of Proof. The burden of proof rests on FERC Staff in an ALJ proceeding. Staff must demonstrate by a preponderance of the evidence that DPT's trading constituted market manipulation within the meaning of Section 222 of the Federal Power Act and

VI. Comparison with Precedent FERC Enforcement Settlements A review of comparable FERC enforcement settlements in market manipulation cases involving organized wholesale electricity markets supports the conclusion that a resolution in Dunmore's target range is reasonable and consistent with Commission precedent. While no two enforcement cases are identical, the following observations regarding recent settlement prece

VII. Recommended Counter-Proposal Strategy A. Proposed Counter-Offer Terms Based on the analysis set forth in this memorandum, we recommend that Dunmore submit a counter-proposal with the following terms: Civil Penalty: $3.5 million, payable in two equal installments: • First installment of $1,750,000 due within 30 calendar days of the date of the Commission's order approving the Stipulation and Consent Agreement; an

1. Disgorgement Should Be Zero Staff's revised $3.2 million disgorgement figure remains unsupported by reliable evidence and is speculative in nature. Dr. Whitfield's analysis, which has not been meaningfully rebutted by Staff, concluded that DPT's actual market impact was no more than $2.1 million, and that the congestion patterns at the Indiana Hub during the Relevant Period were primarily driven by transmission ou

2. Penalty Should Reflect Dunmore's Mitigation Dunmore's mitigation profile is exceptionally strong and warrants a penalty at the lower end of the applicable range under the Penalty Guidelines. The counter-proposal should emphasize: full cooperation with Staff's investigation (187,000 documents from 11 custodians, six employees made available for sworn testimony); proactive compliance investment (CCO hired before the

3. Compliance Plan Has Independent Value to FERC The 36-month Enhanced Compliance Plan serves FERC's remedial objectives independently of any monetary penalty. The Commission has consistently recognized that compliance improvements—particularly those that are independently monitored, comprehensive in scope, and designed to prevent recurrence—have substantial value as an enforcement outcome. Dunmore's investment of ap

4. Risk-Adjusted Value to Staff A consensual resolution with a robust compliance plan and a meaningful civil penalty achieves FERC Staff's enforcement objectives while avoiding the risks and resource expenditure of ALJ litigation. Staff's case has meaningful vulnerabilities—particularly on the disgorgement/unjust profits element and the scienter element—and an ALJ proceeding could result in a lower penalty or an adve

1. Written Counter-Proposal Submission. Submit the counter-proposal in writing to Christine Pham by January 8, 2024. The written submission should be in the form of a concise letter (no more than 8–10 pages) summarizing the key arguments outlined above, accompanied by the proposed settlement terms. The submission should be professional and constructive in tone while firmly advocating for Dunmore's position.

2. Request Second Settlement Conference. The cover letter should request a second settlement conference within two weeks of the submission—targeting the week of January 15, 2024—to discuss the counter-proposal and continue negotiations. Maintaining momentum in the settlement discussions is important; delays could allow institutional attention to shift or negotiating dynamics to change.

3. Signal Flexibility Within a Narrow Range. During the settlement conference, we should signal Dunmore's willingness to negotiate within a narrow range above $3.5 million on the penalty component, but should hold firm on zero disgorgement. This approach acknowledges that some compromise on the penalty may be necessary while preserving the strategically important position that unjust profits are speculative and shoul

4. Explore Reframing if Staff Insists on Disgorgement. If Staff insists on including some disgorgement component in the settlement, we should explore reframing a small amount as part of an increased penalty rather than a separate disgorgement line item. For example, Dunmore could agree to a total all-in penalty of $4.5 million to $5 million with no separate disgorgement line item, thereby preserving Dunmore's positio

5. Walk-Away Threshold. Per the November 28 Strategy Memo, the total monetary resolution (penalty plus any disgorgement) should not exceed $6 million. Any figure above $6 million should trigger a reassessment of litigation strategy, including a detailed cost-benefit analysis of proceeding to an ALJ hearing versus accepting an above-target settlement. This threshold was established with input from Gavin Harcourt, Mart

VIII. Financial Impact and Client Considerations A. Total Cost of Resolution at Various Scenarios The following table presents the estimated total all-in cost to Dunmore at various resolution scenarios, including not only the monetary terms of the settlement (penalty and disgorgement) but also legal fees, expert fees, compliance costs, and e-discovery costs: These cost estimates are based on the assumption that the m

IX. Recommended Next Steps and Timeline Based on the foregoing analysis, we recommend the following next steps on the timeline indicated:

1. December 22, 2023: Circulate this memorandum to Catherine Bloom and seek her approval of the recommended counter-proposal strategy, including the proposed terms ($3.5 million penalty, zero disgorgement, 36-month compliance plan, "neither admit nor deny" language).

2. December 22–29, 2023: Seek authorization from Martin Llewellyn (General Counsel, DEH) and Gavin Harcourt (CEO, DEH) to submit the $3.5 million counter-proposal. Catherine Bloom and I will schedule a call with Mr. Llewellyn and Mr. Harcourt to discuss the analysis and recommendations in this memorandum and to confirm their alignment with the proposed strategy.

3. January 2–8, 2024: Draft and finalize the counter-proposal letter to Christine Pham. The letter will be prepared by Hannah Brinkley, reviewed by Catherine Bloom, and submitted to Christine Pham no later than January 8, 2024. A draft of the counter-proposal letter will be circulated to Catherine Bloom for review by January 3, 2024.

4. January 8, 2024: Submit the counter-proposal letter to Christine Pham and request a second settlement conference for the week of January 15, 2024. The submission should be made via email with a follow-up hard copy transmitted via overnight courier.

5. Week of January 15, 2024: Second settlement conference with FERC Staff. The Calderwood & Harkness attendees should include Catherine Bloom and Hannah Brinkley; Martin Llewellyn should attend on behalf of Dunmore. We recommend that the conference be conducted in person at FERC's offices in Washington, D.C., if schedules permit, to demonstrate Dunmore's seriousness and engagement.

6. Late January 2024: If agreement is reached