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MEMORANDUM
June 8, 2023
TO: Catherine Bloom, Responsible Partner, Calderwood & Harkness LLP
FROM: Hannah Brinkley, Lead Associate, Calderwood & Harkness LLP Patrick Gallagher, Working Associate, Calderwood & Harkness LLP
RE: Internal Case Assessment — FERC Office of Enforcement Preliminary Inquiry Regarding Dunmore Energy Holdings Ltd. and Dunmore Power Trading LLC; Docket No. IN23-7-000
C&H Matter No.: 1016-00004
C&H Billing Code: 71420.00001
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I. Executive Summary
Calderwood & Harkness LLP ("C&H" or the "Firm") was engaged on May 24, 2023, by Dunmore Energy Holdings Ltd. ("DEH" or "Dunmore") through its General Counsel, Martin Llewellyn, to represent DEH and its wholly owned power marketing subsidiary, Dunmore Power Trading LLC ("DPT"), in connection with a preliminary inquiry initiated by the Federal Energy Regulatory Commission's Office of Enforcement ("FERC OE" or "OE"). The inquiry concerns alleged market manipulation in the Midcontinent Independent System Operator, Inc. ("MISO") Day-Ahead and Real-Time energy markets during the period from January 3, 2022, through March 17, 2023 (the "Relevant Period").
FERC OE initiated this inquiry by issuing a preliminary inquiry letter dated May 22, 2023, addressed to Rhonda Vasquez, Vice President, Regulatory Affairs, DEH. The letter cited concerns about potential violations of Section 222 of the Federal Power Act, 16 U.S.C. § 824v, and the Commission's anti-manipulation rule at 18 C.F.R. § 1c.2. On June 12, 2023, FERC OE issued a formal non-public order of investigation pursuant to 18 C.F.R. Part 1b, designating the matter as Docket No. IN23-7-000. The investigation has thus transitioned from a preliminary inquiry to a formal investigation, broadening the scope of FERC Staff's investigative authority and underscoring the seriousness with which the Commission's enforcement arm views the alleged conduct.
The inquiry originated from a referral by MISO's Independent Market Monitor ("IMM"), Velthorn Market Analytics, Inc. (Dr. Patricia Engel, President), submitted to FERC OE on April 3, 2023. The referral flagged anomalous bidding patterns by DPT in the MISO Day-Ahead market at the Indiana Hub, coupled with correlated virtual transactions and Financial Transmission Rights ("FTR") positions that allegedly benefited from the resulting congestion patterns.
This memorandum provides an initial assessment of the factual background, the applicable legal framework, the potential exposure faced by Dunmore (including civil penalties and disgorgement), available defenses, and a recommended strategy for the Firm's representation of Dunmore in this matter. Based on our preliminary review of the facts and applicable law, our initial assessment is as follows:
• Exposure is significant but defensible. The alleged conduct falls within a recognized grey area between legitimate portfolio optimization — a practice widely accepted in organized wholesale electricity markets — and potentially manipulative cross-product trading. FERC's enforcement focus on multi-legged manipulation schemes involving physical-financial coordination has intensified in recent years, and the factual pattern here maps onto the type of conduct that OE has targeted in precedent cases.
• The strongest available defense centers on the portfolio optimization rationale for DPT's Day-Ahead offers and the independent impact of transmission outage events on congestion patterns at the Indiana Hub. If we can establish that congestion was driven primarily by exogenous factors (transmission outages), and that DPT's negative-priced offers were economically rational in the context of contractual minimum generation obligations and portfolio-level economics, we can substantially weaken FERC Staff's manipulation theory and reduce the ultimate exposure.
• Estimated total exposure (civil penalties plus disgorgement) ranges from approximately $5 million at the low end (strong defense, maximum mitigation credits) to approximately $30–40 million at the high end (Staff position prevails on all points). The most likely resolution range, assuming a cooperative posture and moderate defense success, falls between $15 million and $20 million.
• Recommended strategy: Full cooperation with FERC OE to maximize mitigation credit under the Penalty Guidelines, combined with vigorous factual and economic defense development. We recommend positioning early for a negotiated consent agreement resolution to avoid the risks and costs of formal litigation before an Administrative Law Judge ("ALJ").
II. Background on the Client
A. Dunmore Energy Holdings Ltd. (DEH)
Dunmore Energy Holdings Ltd. is a Cayman Islands exempted company with its registered office at 4th Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman, KY1-1002, Cayman Islands. Its principal United States office is located at 2200 Post Oak Boulevard, Suite 3100, Houston, Texas 77056. DEH's Employer Identification Number is 98-1347562.
DEH is a vertically integrated energy holding company with operations spanning upstream oil and gas production, midstream natural gas gathering and pipeline assets, and a growing portfolio of wind and solar generation across the U.S. Midwest and Gulf Coast regions. The company has undertaken a significant expansion of its renewable generation capacity in recent years, consistent with broader industry trends toward portfolio diversification and decarbonization.
DEH is privately held. Equity ownership is concentrated among the following parties:
• Gavin Harcourt (Founder, Chairman & CEO): 38% direct equity interest;
• Harcourt Family Trust: 16% additional equity interest (combined Harcourt family control: 54%);
• Pendleton Capital Partners, LP (Managing Partner: Richard Ostrander): 27% equity interest;
• Greenvale Infrastructure Fund III (Managing Director: Susan Tanaka): 19% equity interest.
Mr. Harcourt, a British national aged 61, maintains effective control of DEH through the combined 54% voting equity held directly and through the Harcourt Family Trust. Pendleton Capital Partners, LP is a Houston-based private equity firm with a focus on energy infrastructure investments, and Greenvale Infrastructure Fund III is a New York-based infrastructure fund investing primarily in U.S. energy assets. The participation of these institutional investors creates potential notification obligations that are addressed in Section IX.D of this memorandum.
Key financial metrics for fiscal year 2022 include consolidated revenue of approximately $3.82 billion and adjusted EBITDA of approximately $891 million. DEH's U.S. net generation capacity totals approximately 4,280 megawatts ("MW"), consisting of approximately 2,650 MW of natural gas-fired generation, 1,130 MW of wind generation, and 500 MW of solar generation. The gas-fired generation fleet, which is at the center of the FERC inquiry, is located primarily in Indiana and Illinois and operates within MISO's footprint.
B. Dunmore Power Trading LLC (DPT)
Dunmore Power Trading LLC is a Delaware limited liability company with its registered agent at Capitol Registered Agents Inc., 1209 Orange Street, Wilmington, Delaware 19801. DPT's Employer Identification Number is 82-4519763.
DPT is a wholly owned subsidiary of DEH and holds FERC market-based rate authorization under Docket No. ER05-1128-000. DPT is the entity through which all of Dunmore's wholesale electricity trading in the MISO and Southwest Power Pool ("SPP") organized wholesale electricity markets is conducted. DPT is registered as a market participant in both MISO and SPP and is subject to the applicable tariff provisions, business practice manuals, and market rules of each RTO/ISO.
For fiscal year 2022, DPT reported revenue of approximately $614 million. DPT's MISO trading volume in calendar year 2022 was approximately 18.4 million megawatt-hours ("MWh"), reflecting substantial market participation across both the Day-Ahead and Real-Time energy markets, as well as the FTR auction and bilateral FTR markets.
During the Relevant Period, DPT's MISO trading desk employed fourteen (14) traders, supervised by Derek Sung, Senior Vice President, Power Marketing & Trading. The two traders specifically identified in FERC OE's inquiry are:
• Kyle Renfro, Senior Trader, MISO Day-Ahead Desk, age 36. Mr. Renfro is responsible for formulating and submitting Day-Ahead generation offers for DPT's gas-fired units at the Indiana Hub and related pricing nodes. He has been employed by DPT since 2016 and has approximately twelve years of experience in wholesale power trading.
• Anastasia Petrov, Trader, MISO Real-Time Desk, age 31. Ms. Petrov is responsible for executing virtual transactions (Increment Offers and Decrement Bids) in the MISO Real-Time market. She joined DPT in 2019 and has approximately seven years of experience in organized electricity markets.
Both Renfro and Petrov reported directly to Derek Sung during the Relevant Period. The supervisory chain is significant to the scienter analysis, as discussed in Section VI.E below.
C. Dunmore Midstream Partners LP (DMP)
Dunmore Midstream Partners LP is a Delaware limited partnership with Employer Identification Number 47-8831205. DMP operates natural gas gathering systems and pipeline infrastructure that supply natural gas to several of Dunmore's gas-fired generation plants in Indiana and Illinois.
DMP's relevance to the FERC inquiry is twofold. First, FERC OE is examining whether DPT's bidding behavior was coordinated with physical gas scheduling through DMP — specifically, whether DPT manipulated gas nomination volumes through DMP to mask the true marginal cost of its gas-fired generation units, thereby making the negative-priced Day-Ahead offers appear more consistent with actual fuel costs. Second, DMP's gas supply agreements with DPT contain take-or-pay provisions and minimum volume commitments that may provide the factual basis for a key defense — namely, that the negative-priced offers reflected the opportunity cost of contractual minimum generation obligations rather than a manipulative intent. These matters are discussed further in Sections IV.E and VI.B below.
D. Key Dunmore Personnel
The following individuals are the principal Dunmore personnel relevant to the investigation:
• Gavin Harcourt — Founder, Chairman & CEO; British national, age 61, based in Houston. Mr. Harcourt exercises overall strategic direction of DEH and its subsidiaries. While he is not believed to have had direct involvement in the day-to-day trading decisions at issue, his role as controlling shareholder and CEO means he will need to be briefed on the investigation and may ultimately be involved in settlement authority decisions.
• Elena Mirova — President & Chief Operating Officer, age 49, based in Houston. Ms. Mirova oversees day-to-day operations across all of Dunmore's business segments, including DPT's power marketing and trading activities. She receives regular portfolio reports from Derek Sung and was aware of the general trading strategies employed on the MISO desk during the Relevant Period.
• Derek Sung — Senior Vice President, Power Marketing & Trading, DPT, age 44. Mr. Sung directly supervised the MISO trading desk, including Renfro and Petrov, during the Relevant Period. He approved the trading strategies at issue and is a critical witness in the investigation. Mr. Sung's knowledge of, and involvement in, the strategic rationale for DPT's bidding patterns will be central to both the defense and the scienter analysis.
• Rhonda Vasquez — Vice President, Regulatory Affairs, DEH, age 52. Ms. Vasquez is Dunmore's primary interface with FERC on regulatory compliance matters. She received the May 22, 2023 preliminary inquiry letter and was the initial point of contact for FERC OE. Ms. Vasquez has extensive experience managing FERC filings and communications but has not previously managed an enforcement proceeding of this nature.
• Martin Llewellyn — General Counsel, DEH, age 56. Mr. Llewellyn engaged Calderwood & Harkness to represent Dunmore in this matter. He serves as our primary internal client contact and will coordinate access to personnel, documents, and information.
• Jennifer Caulfield — Chief Compliance Officer, DEH, age 47. Ms. Caulfield was hired on February 6, 2023 — shortly before the end of the Relevant Period and before the commencement of the FERC investigation. Her appointment is significant for purposes of mitigation under the Penalty Guidelines, as it demonstrates that Dunmore was proactively investing in compliance improvements independent of any regulatory pressure. Ms. Caulfield's prior experience includes twelve years at a major integrated utility and two years at a boutique compliance consulting firm.
III. Origin of the Investigation
A. Velthorn Market Analytics Referral
Velthorn Market Analytics, Inc. serves as MISO's Independent Market Monitor under the terms of MISO's FERC-approved Open Access Transmission, Energy, and Operating Reserve Markets Tariff ("MISO Tariff"). Velthorn's principal office is located at 900 North Michigan Avenue, Suite 1400, Chicago, Illinois 60611, and is led by Dr. Patricia Engel, President. The IMM plays a critical role in MISO's market oversight framework, conducting real-time and retrospective surveillance of market participant behavior and referring potentially manipulative conduct to FERC OE for further investigation.
On April 3, 2023, Velthorn submitted a referral letter to FERC OE flagging anomalous bidding patterns associated with DPT's Day-Ahead offers at the Indiana Hub, coupled with correlated virtual positions at the Minnesota Hub and FTR positions that appeared to benefit from the resulting congestion patterns. We have not yet obtained a copy of the Velthorn referral letter itself — such referrals are treated as confidential by both the IMM and FERC OE — but the substance of the referral is described in general terms in FERC OE's May 22 preliminary inquiry letter and the June 12 order of investigation.
Based on information currently available, the Velthorn referral identified the following key patterns:
• DPT submitted Day-Ahead generation offers at the Indiana Hub at negative prices (ranging from approximately -$15/MWh to -$40/MWh) that appeared inconsistent with the marginal cost of the underlying generation units, taking into account the cost of fuel (natural gas), variable operations and maintenance costs, and other incremental production costs.
• DPT simultaneously held FTR positions that would increase in value from the specific congestion patterns that would result from the acceptance of these below-cost offers into the Day-Ahead market.
• DPT executed virtual transactions (Increment Offers and Decrement Bids) at the Minnesota Hub that appeared designed to amplify the congestion differential between the Indiana Hub and the Minnesota Hub.
The Velthorn referral reportedly concluded that the totality of these trading patterns raised concerns about a potential multi-legged manipulation strategy in which below-cost physical generation offers were used as a mechanism to create artificial congestion for the benefit of correlated FTR positions.
We note that Velthorn referrals to FERC OE are not uncommon — the IMM refers dozens of matters to FERC annually — and a significant percentage of referrals are ultimately closed without enforcement action. However, the fact that FERC OE has moved expeditiously from preliminary inquiry (May 22) to formal investigation (June 12) suggests that Staff views the referral as having sufficient merit to warrant a full investigation.
B. FERC OE Preliminary Inquiry and Formal Investigation
On May 22, 2023, FERC OE issued a preliminary inquiry letter to Dunmore, addressed to Rhonda Vasquez, Vice President, Regulatory Affairs. The letter cited concerns about potential violations of Section 222 of the Federal Power Act (16 U.S.C. § 824v) and the Commission's anti-manipulation rule at 18 C.F.R. § 1c.2 in connection with DPT's trading activity in the MISO Day-Ahead and Real-Time energy markets. The letter referenced the Velthorn referral and requested that Dunmore preserve all documents and communications related to DPT's trading activities in the MISO markets during the Relevant Period. The letter also requested that Dunmore provide an initial response within twenty (20) days addressing the factual bases for its trading activity.
Ms. Vasquez promptly notified Martin Llewellyn, who contacted C&H on May 23, 2023. After completing our conflict check on May 23 (see Section VII below), we were formally engaged on May 24, 2023. On May 25, 2023, we coordinated with Mr. Llewellyn and Ms. Vasquez to issue a litigation hold directive to all relevant Dunmore personnel and IT departments.
On June 12, 2023, FERC OE issued a formal non-public order of investigation pursuant to 18 C.F.R. Part 1b, designating the matter as Docket No. IN23-7-000. The formal order of investigation grants FERC Staff significantly broader investigative authority than a preliminary inquiry, including the power to issue subpoenas for documents and testimony, compel testimony under oath pursuant to 18 C.F.R. § 1b.12, and exercise other investigatory powers specified in Part 1b. The issuance of a formal order is a meaningful escalation and signals that FERC Staff has made an initial determination that the matter warrants full investigation.
The FERC Staff team identified in correspondence to date includes:
• Margaret Hollowell, Director, Division of Investigations, Office of Enforcement;
• Thomas Adebayo, Lead Investigator, Division of Investigations;
• Christine Pham, Senior Attorney, Division of Investigations;
• Dr. Samuel Breck, Senior Economist, Division of Analytics and Surveillance.
Ms. Hollowell's involvement as Division Director underscores the significance that OE attaches to this matter. Mr. Adebayo and Ms. Pham will be our primary points of contact on the Staff side, and Dr. Breck will be responsible for the economic analysis underlying Staff's market impact and unjust profits calculations. We have not previously worked with Mr. Adebayo or Ms. Pham on a FERC matter, but Catherine Bloom has interacted with Ms. Hollowell in the context of prior enforcement proceedings.
IV. The Alleged Conduct
A. Relevant Period
FERC OE has defined the Relevant Period as January 3, 2022, through March 17, 2023 — a span of approximately fourteen and one-half (14.5) months comprising approximately 310 trading days. The conduct at issue occurred within MISO's organized wholesale electricity markets, specifically at the Indiana Hub and Minnesota Hub pricing nodes.
The Indiana Hub is a commercial pricing point within MISO's footprint, representing a weighted average of Locational Marginal Prices ("LMPs") at a defined set of generation and load nodes in Indiana. The Minnesota Hub is a similar commercial pricing point in MISO's northern footprint. The difference between the LMPs at these two hubs — the "congestion component" or "basis differential" — is the key market variable at the heart of the alleged manipulation scheme.
B. Uneconomic Day-Ahead Bidding at Indiana Hub
FERC's preliminary inquiry suggests that Kyle Renfro, DPT's Senior Trader on the MISO Day-Ahead Desk, submitted Day-Ahead generation offers for Dunmore's gas-fired generation units at prices significantly below the marginal cost of production. Specifically, offer prices ranged as low as negative $15 per MWh (-$15/MWh) to negative $40 per MWh (-$40/MWh) at the Indiana Hub during the Relevant Period.
FERC Staff's theory is that these uneconomic offers were designed not to reflect the legitimate economics of the underlying generation units, but rather to create artificial congestion patterns at the Indiana Hub. By offering generation at prices well below marginal cost, DPT effectively guaranteed that its generation units would be dispatched in the Day-Ahead market, increasing the supply of energy at the Indiana Hub and depressing LMPs at that location. This, in turn, would widen the congestion differential between the Indiana Hub and other pricing points, including the Minnesota Hub.
The total volume of allegedly uneconomic Day-Ahead generation offers submitted by DPT during the Relevant Period is approximately 2,840 gigawatt-hours ("GWh"), or approximately 2.84 million MWh. This represents a substantial portion of DPT's overall MISO Day-Ahead market activity during the period. The magnitude and consistency of the below-cost offers — persisting over a 14.5-month period — is one of the factors that attracted the attention of Velthorn's surveillance algorithms.
We note that the submission of negative-priced Day-Ahead offers is not, in itself, illegal or unusual in organized wholesale electricity markets. Market participants routinely submit negative offers in certain circumstances — for example, when generation units have minimum run requirements, start-up cost recovery provisions, or contractual obligations that make it economically rational to offer at negative prices rather than curtail output. The critical question is whether DPT's specific negative offers were economically justified in the context of its portfolio economics and contractual obligations, or whether they were submitted primarily to create artificial congestion for the benefit of correlated financial positions.
C. Financial Transmission Rights (FTR) Positions
DPT simultaneously held FTR positions that would increase in value from the specific congestion patterns allegedly created by the uneconomic Day-Ahead bids at the Indiana Hub. FTRs are financial instruments that entitle the holder to receive (or obligate the holder to pay) revenues based on congestion price differences between specified source and sink points in the MISO market. An FTR position from a source at the Indiana Hub to a sink at the Minnesota Hub, for example, would increase in value as the congestion differential between those two points widened.
According to FERC Staff's preliminary analysis, the total notional value of FTR positions held by DPT that benefited from the alleged manipulation was approximately $47.3 million over the Relevant Period. This figure represents the aggregate notional value of FTR positions across multiple source-sink paths that were directionally consistent with the congestion patterns allegedly created by DPT's uneconomic Day-Ahead offers.
FERC Staff's theory characterizes the FTR positions as the "profit center" of the alleged scheme. Under this theory, the uneconomic Day-Ahead generation offers were the mechanism — the tool used to artificially create or exacerbate congestion — while the FTR positions were the vehicle through which DPT captured the financial benefit of that artificial congestion. The losses incurred on the below-cost generation offers were, according to Staff's theory, more than offset by the gains on the FTR positions, resulting in a net profit to DPT.
The FTR acquisition timeline will be critical to our defense, as discussed in Section VI.C below. If DPT acquired these FTR positions well before the start of the Relevant Period as part of a routine hedging strategy, this fact would substantially undermine Staff's theory that the FTRs were acquired as part of a coordinated manipulation scheme.
D. Cross-Product Manipulation via Virtual Transactions at Minnesota Hub
In addition to the physical generation offers at the Indiana Hub and the FTR positions, FERC Staff alleges that DPT engaged in a coordinated strategy involving virtual transactions at the Minnesota Hub. Anastasia Petrov, DPT's Trader on the MISO Real-Time Desk, executed Increment Offers ("INCs") and Decrement Bids ("DECs") at the Minnesota Hub during the Relevant Period.
FERC Staff alleges that these virtual positions were designed to amplify the congestion differential created by the uneconomic Day-Ahead bids at the Indiana Hub. Specifically, by placing virtual supply (INCs) or virtual demand (DECs) at the Minnesota Hub, DPT allegedly widened the basis differential between the two hubs, further increasing the value of its FTR positions.
The total volume of virtual transactions executed by DPT at the Minnesota Hub during the Relevant Period was approximately 1,620 GWh, or 1.62 million MWh. The timing and volume patterns of these virtual transactions, when viewed in conjunction with the Day-Ahead offers at the Indiana Hub and the FTR positions, form the basis for FERC Staff's cross-product manipulation theory.
The cross-product theory — involving the coordination of physical generation offers, virtual transactions, and FTR positions — is consistent with FERC's evolving enforcement focus on multi-legged manipulation schemes. In recent years, FERC has brought several high-profile enforcement actions involving allegations that market participants used one set of positions (typically physical or virtual) to create price impacts that benefited a correlated set of financial positions (typically FTRs, swap positions, or congestion-related instruments). This enforcement trend makes the present case particularly significant, as FERC may view it as an opportunity to further develop its precedent in the multi-legged manipulation space.
E. Physical-Financial Coordination with Dunmore Midstream Partners LP
FERC Staff's theory includes an additional layer of alleged coordination involving Dunmore Midstream Partners LP. Staff alleges that DPT coordinated the timing and volume of natural gas nominations through DMP to support the uneconomic generation offers at the Indiana Hub.
Specifically, FERC Staff contends that by manipulating gas nomination volumes through DMP, DPT was able to mask the true marginal cost of its gas-fired generation units, making the negative-priced offers appear more consistent with actual fuel costs than they otherwise would have been. If, for example, DPT over-nominated gas volumes through DMP, it could have created the appearance of lower per-unit gas costs that would justify lower generation offer prices.
This leg of the alleged scheme raises additional complexity because it involves coordination between two Dunmore affiliates — DPT (the power trading subsidiary) and DMP (the midstream pipeline subsidiary). If FERC Staff can establish that the two entities acted in concert to facilitate the manipulation, this could support arguments for heightened culpability, broader organizational liability, and potentially separate violations attributable to each entity.
The physical-financial coordination theory also implicates DMP's gas supply agreements and take-or-pay provisions, which are simultaneously relevant to our defense theory regarding contractual minimum generation obligations (discussed in Section VI.B below). We will need to carefully analyze these agreements to determine whether they support DPT's defense or, conversely, whether the gas nomination patterns are inconsistent with what would be expected under normal contractual operations.
F. FERC Staff's Estimated Unjust Profits
FERC Staff's preliminary estimate of "unjust profits" attributable to the alleged scheme is $12.8 million. This estimate was prepared by Dr. Samuel Breck, Senior Economist in OE's Division of Analytics and Surveillance, and reflects Staff's assessment of the net financial benefit that DPT derived from the allegedly manipulative trading pattern.
The unjust profits calculation appears to aggregate three components: (i) FTR gains attributed to artificial congestion at the Indiana Hub; (ii) virtual transaction profits at the Minnesota Hub; and (iii) a net offset for losses incurred on the uneconomic generation offers. The net figure of $12.8 million represents the difference between (a) the total financial gains on the FTR and virtual positions that Staff attributes to the alleged manipulation and (b) the total financial losses on the below-cost generation offers.
We have not yet received the full details of Dr. Breck's methodology, and we anticipate that the economic analysis will be the subject of significant dispute. Our preliminary review suggests several potential weaknesses in Staff's calculation, including questions about the counterfactual baseline used to estimate "but-for" congestion levels, the attribution of observed congestion to DPT's trading activity versus exogenous factors (such as transmission outages), and the methodology used to allocate FTR gains between those attributable to the alleged manipulation and those attributable to legitimate market factors.
V. Legal Framework and Potential Exposure
A. Applicable Statutory and Regulatory Provisions
The FERC OE investigation is grounded in the following statutory and regulatory provisions:
Section 222 of the Federal Power Act (16 U.S.C. § 824v). Enacted as part of the Energy Policy Act of 2005, Section 222 prohibits "the use or employment of any manipulative or deceptive device or contrivance" by any entity "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," in contravention of such rules and regulations as the Commission may prescribe. This provision is modeled on Section 10(b) of the Securities Exchange Act of 1934 and is the principal statutory basis for FERC's anti-manipulation enforcement authority.
18 C.F.R. § 1c.2 — Anti-Manipulation Rule. The Commission's anti-manipulation rule, implementing Section 222, establishes the elements that FERC must prove to establish a violation. Under § 1c.2, it is unlawful for any entity, directly or indirectly, 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:
(1) to use or employ any device, scheme, or artifice to defraud;
(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
(3) to engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity.
The elements of a violation under § 1c.2 thus require proof of (i) a fraudulent device, scheme, or artifice, or a material misrepresentation or omission, or conduct that operates as a fraud or deceit upon any entity; (ii) a nexus "in connection with" the purchase or sale of electric energy or transmission services subject to FERC jurisdiction; and (iii) the requisite scienter.
Scienter Requirement. Critically, the scienter element requires proof that the respondent acted with intent to deceive or manipulate, or with reckless disregard of a known obligation. Negligence is not sufficient to establish a violation under § 1c.2. The Commission has stated that scienter may be demonstrated through direct or circumstantial evidence, including evidence of trading patterns, timing, profitability, internal communications, and the absence of legitimate economic rationale for the conduct in question. In the context of multi-legged manipulation cases, FERC has relied heavily on internal communications — emails, instant messages, and recorded trader phone conversations — to establish the requisite intent. This makes the document review process discussed in Section VIII.A critically important to our assessment.
18 C.F.R. Part 1b — Investigation Procedures. The Commission's investigation procedures under Part 1b govern the conduct of FERC's non-public investigations. Key provisions include:
• 18 C.F.R. § 1b.12: authorizes FERC Staff to require testimony under oath from any person who Staff believes may have information relevant to the investigation;
• 18 C.F.R. § 1b.18: provides for the issuance of subpoenas for documents and testimony;
• 18 C.F.R. § 1b.19: addresses the non-public nature of investigations, including the Commission's policy of treating the existence and subject matter of Part 1b investigations as non-public unless and until the matter results in a public enforcement action.
The non-public nature of Part 1b investigations is significant for Dunmore. As long as the matter remains in the investigation phase and is resolved through a consent agreement, the specific details of the inquiry need not become public. If, however, the matter proceeds to formal litigation before an ALJ, the proceeding becomes public, with attendant reputational risks for Dunmore.
B. Civil Penalty Exposure
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 the Commission to assess civil penalties of up to approximately $1.5 million per violation per day for violations of, among other provisions, Section 222. The per-violation-per-day penalty cap is subject to annual adjustment for inflation, and the current effective cap as of 2023 stands at approximately $1,534,124 per violation per day.
FERC Penalty Guidelines. In practice, FERC calculates civil penalties using its Revised Policy Statement on Penalty Guidelines (131 FERC ¶ 61,156 (2010)), which provides a structured methodology modeled on the U.S. Sentencing Guidelines framework. The Penalty Guidelines establish a multi-step process for calculating an appropriate penalty:
Step 1 — Base Penalty Amount: The base penalty is determined as the greatest of (a) the "violation level" amount from the Penalty Guidelines' penalty table (which takes into account factors such as the volume of transactions, the market impact, and the duration of the violation), (b) the pecuniary gain to the violator from the offense, or (c) the pecuniary loss caused by the violation.
Step 2 — Culpability Score: A culpability score is calculated based on factors including the size of the organization, the involvement of high-level personnel, the organization's prior history of violations, whether the violation was part of a pattern, and whether the organization took steps to obstruct the investigation.
Step 3 — Multiplier Range: The culpability score maps to a minimum and maximum multiplier. The base penalty amount is multiplied by these multipliers to generate a penalty range.
Step 4 — Adjustments: The penalty range may be adjusted upward or downward based on additional factors, including the organization's cooperation with the investigation, the existence and effectiveness of a pre-existing compliance program, the organization's self-reporting of the violation, and remedial measures taken.
Potential Penalty Calculation. Applying the Penalty Guidelines to the facts of the present case, we estimate the following:
• Base Penalty Amount: The base penalty is likely in the range of $6 million to $12 million, reflecting the volume of the alleged conduct (approximately 2,840 GWh of Day-Ahead offers and 1,620 GWh of virtual transactions), the duration of the Relevant Period (14.5 months), and FERC Staff's preliminary estimate of $12.8 million in unjust profits. Under the Guidelines methodology, the base penalty would be set at no less than the $12.8 million in estimated unjust profits if Staff uses that figure as the "pecuniary gain" input.
• Aggravating Multiplier: FERC Staff could apply multipliers for the extended duration of the conduct (14.5 months), the scope of the alleged scheme (multiple pricing nodes, multiple products, coordination among affiliated entities), and the alleged intentional nature of the manipulation. An aggravating multiplier in the range of 1.5x to 2.5x is plausible.
• Mitigating Credits: Dunmore may be eligible for mitigating credits based on several factors: (a) full cooperation with the investigation, including prompt document production and making employees available for testimony; (b) remedial measures, including the appointment of a Chief Compliance Officer (Jennifer Caulfield) before the investigation commenced; (c) the existence of a pre-existing compliance program (though we have not yet assessed its adequacy under the Guidelines criteria); and (d) commitment to implement an enhanced compliance program. Mitigating credits could offset a meaningful portion of the aggravating factors. However, Dunmore did not self-report the conduct to FERC, which limits the maximum available mitigating credit.
• Estimated Penalty Range: Taking into account the base penalty, potential aggravating multipliers, and available mitigating credits, we estimate a penalty range of approximately $9 million to $25 million. The wide range reflects substantial uncertainty in how Staff will apply the Guidelines methodology and the weight that will be given to Dunmore's cooperation and compliance efforts.
• Theoretical Maximum (Per-Day Analysis): If FERC were to characterize each trading day during the Relevant Period as a separate violation — which is theoretically permissible under the per-violation-per-day framework — the Relevant Period includes approximately 310 trading days, yielding a theoretical maximum penalty of approximately $310 × $1.53 million ≈ $475 million. We consider this extreme figure to be highly unlikely as a practical matter. FERC has not historically sought to impose penalties at the statutory maximum, and the Penalty Guidelines methodology contemplates a more calibrated approach. Nevertheless, this theoretical ceiling informs the upper bound of Dunmore's exposure and provides context for settlement negotiations.
C. Disgorgement Exposure
In addition to civil penalties, FERC routinely seeks disgorgement of unjust profits in manipulation cases. Disgorgement is an equitable remedy designed to deprive the wrongdoer of the financial benefit of its misconduct, and FERC has consistently sought disgorgement in cases involving manipulative trading in organized wholesale electricity markets.
FERC Staff's preliminary estimate of unjust profits is $12.8 million. If Staff's analysis prevails, FERC would likely seek disgorgement of the full $12.8 million in addition to the civil penalty. Disgorgement is typically calculated as the net gain attributable to the manipulative conduct, with reasonable offsets for costs incurred in executing the relevant positions. The disgorgement amount may also include pre-judgment interest from the date of the manipulation to the date of payment.
The disgorgement calculation presents a significant defense opportunity. If we can demonstrate, through independent economic analysis, that the congestion patterns at the Indiana Hub during the Relevant Period were driven primarily by transmission outage events rather than DPT's bidding, the causal nexus between DPT's trading and the alleged market impact would be weakened. This, in turn, would reduce the amount of unjust profits attributable to DPT's conduct. Depending on the outcome of the economic analysis, we believe there is a reasonable basis to argue that the actual unjust profits attributable to DPT's trading are substantially lower than $12.8 million — potentially in the range of $2 million to $5 million.
Initial estimated disgorgement exposure: $2 million to $12.8 million, depending on the success of our rebuttal analysis.
D. Total Estimated Exposure Range
Based on the foregoing analysis, we estimate Dunmore's total financial exposure (civil penalties plus disgorgement) as follows:
These estimates do not include legal fees, expert costs, compliance program implementation costs, or indirect costs associated with the investigation (management time, business disruption, etc.). If the matter proceeds to formal litigation before an ALJ and the Commission, the exposure could increase further due to the adversarial nature of the proceeding, the potential for the ALJ or Commission to apply a higher penalty than Staff initially seeks, and the fact that the proceeding would become public — with attendant reputational and business consequences for Dunmore.
VI. Preliminary Assessment of Defenses
A. Portfolio Optimization Defense
Our central defense theory is that DPT's negative Day-Ahead offers reflected a legitimate portfolio optimization strategy, not market manipulation. Under this theory, the negative offers were economically rational when viewed in the context of DPT's overall portfolio, which included physical generation assets, FTR positions, and virtual positions that were managed holistically as an integrated portfolio.
Portfolio optimization is a widely recognized and legally permissible practice in organized wholesale electricity markets. Market participants with diverse portfolios — including physical generation, load-serving obligations, financial hedging instruments, and virtual positions — routinely consider the cross-portfolio impact of individual trading decisions. A physical generation offer that appears uneconomic when viewed in isolation may be entirely rational when its impact on the participant's overall portfolio is taken into account.
FERC has recognized, in multiple precedent decisions and enforcement orders, that portfolio optimization involving negative offers can be legitimate where the participant has an economic rationale beyond artificially creating congestion. The key distinction, as articulated by the Commission, is between (a) trading that is designed to benefit a correlated financial position through the creation of artificial price impacts, and (b) trading that reflects the legitimate economics of the participant's integrated portfolio, even if it incidentally benefits correlated positions. The former constitutes manipulation; the latter does not.
The challenge in this case is that DPT's conduct falls squarely within the grey area between these two categories. The negative Day-Ahead offers, the FTR positions, and the virtual transactions are all individually permissible market activities. The question is whether they were combined in a manner that constitutes a "scheme or artifice to defraud" or "conduct that operates as a fraud or deceit" under § 1c.2.
To sustain this defense, we will need to establish the following through documentary evidence and witness testimony:
(i) DPT maintained a written portfolio optimization strategy that articulated the rationale for submitting negative Day-Ahead offers in the context of the overall portfolio;
(ii) The trading decisions at issue were consistent with this documented strategy and were made pursuant to established internal trading policies and procedures;
(iii) The FTR positions and virtual transactions were acquired and executed for independent, legitimate reasons (e.g., hedging, congestion risk management) and were not designed solely to exploit artificial congestion created by the uneconomic generation offers; and
(iv) Supervisory personnel (specifically Derek Sung) reviewed and approved the trading strategy with an understanding of its portfolio optimization rationale.
We have not yet reviewed the relevant internal documentation. If contemporaneous records supporting the portfolio optimization rationale exist and are consistent across email communications, trading desk memos, strategy presentations, and supervisor approvals, this defense will be substantially strengthened. If, on the other hand, the documentary record is thin, inconsistent, or contradicted by internal communications suggesting an awareness of the manipulative effect of the strategy, the defense will be more difficult to sustain.
B. Opportunity Cost and Contractual Minimum Generation Obligations
An important factual predicate for the portfolio optimization defense is the existence of contractual minimum generation obligations that made the negative Day-Ahead offers economically rational. Specifically, DPT's gas-fired generation units are supplied by natural gas under take-or-pay gas supply agreements with Dunmore Midstream Partners LP. These agreements contain minimum volume commitments that obligate DPT (or its affiliated entities) to purchase specified minimum quantities of natural gas regardless of whether the gas is actually consumed for generation.
If the cost of not running the generation units — including contract penalties for failure to take minimum gas volumes, gas imbalance charges on the MISO pipeline system, and the cost of disposing of unneeded gas in a potentially unfavorable gas market — exceeded the losses associated with offering generation at negative prices, then the negative offers would have reflected a legitimate opportunity cost calculation rather than a manipulative intent.
This defense theory has the advantage of providing a concrete, quantifiable economic justification for the negative offers. If we can demonstrate that, for each day during the Relevant Period on which DPT submitted negative Day-Ahead offers, the alternative cost of curtailing generation and absorbing the contractual penalties exceeded the cost of the negative offers, we will have a powerful rebuttal to FERC Staff's claim that the offers were "uneconomic."
To develop this defense, we need to compile and analyze the following materials:
• All gas supply agreements between DPT (or DEH) and DMP, including all amendments, supplements, and side letters;
• Minimum take obligations, including daily and monthly volume commitments and associated penalty provisions;
• Gas nomination records for DMP during the Relevant Period, showing actual nominations versus contractual minimums;
• Gas imbalance records and any penalties assessed during the Relevant Period; and
• Internal analyses, memoranda, or communications reflecting DPT's consideration of contractual minimum obligations in formulating Day-Ahead offer prices.
C. FTR Acquisition Timing
The timing of DPT's FTR acquisitions is a critical factual issue. If the FTR positions that benefited from the alleged manipulation were acquired months before the start of the Relevant Period (i.e., before January 3, 2022) as part of a routine hedging strategy unrelated to the Day-Ahead bidding pattern, this fact would substantially undermine FERC Staff's theory that the FTRs were acquired as the intended "profit center" of a coordinated manipulation scheme.
Conversely, if the FTR positions were acquired during or after the start of the Relevant Period — particularly if they were acquired contemporaneously with changes in DPT's Day-Ahead bidding patterns — the temporal correlation would support Staff's theory of coordinated manipulation.
We need to document the following for each FTR position identified in FERC Staff's analysis:
• Acquisition date and method (MISO FTR auction, bilateral purchase, or other);
• Acquisition price and notional value;
• Source and sink points;
• Business rationale contemporaneous with acquisition (hedging obligation, congestion risk management, speculative position); and
• Any internal communications or strategy documents discussing the FTR acquisition decision.
If the FTR acquisition records demonstrate that DPT acquired these positions as part of its annual FTR procurement strategy — well in advance of the Day-Ahead bidding patterns at issue — this will be one of the strongest factual pillars of our defense.
D. Transmission Outage Causation
Our preliminary review of publicly available MISO market data suggests that congestion patterns at the Indiana Hub during the Relevant Period were significantly influenced by transmission outage events, including both planned and unplanned maintenance on key transmission lines in the Indiana Hub area. If congestion was primarily driven by exogenous transmission factors rather than DPT's bidding, the causal nexus between DPT's offers and the alleged market impact is substantially weakened.
This defense goes directly to FERC Staff's economic analysis and Dr. Breck's unjust profits calculation. If we can demonstrate that the same congestion patterns would have occurred regardless of DPT's negative Day-Ahead offers — because the congestion was caused by transmission constraints that existed independently of DPT's bidding — then the unjust profits attributable to DPT's conduct would be minimal, and the entire manipulation theory would be undermined.
To develop this defense, we will need to retain an economic expert with deep expertise in organized wholesale electricity markets to perform an independent analysis of congestion drivers at the Indiana Hub during the Relevant Period. The expert analysis should:
(a) Identify all significant transmission outage events (planned and unplanned) affecting the Indiana Hub during the Relevant Period;
(b) Model the counterfactual congestion levels that would have prevailed absent DPT's negative Day-Ahead offers;
(c) Quantify the incremental congestion attributable to DPT's bidding versus the congestion attributable to transmission outages and other market factors;
(d) Calculate an independent estimate of market impact and unjust profits attributable to DPT's trading, to rebut Dr. Breck's $12.8 million estimate; and
(e) Evaluate whether DPT's bidding strategy was economically rational from a portfolio optimization perspective, taking into account the full range of costs and revenues across the portfolio.
We recommend retaining Dr. Leonard Whitfield of Whitfield Economic Advisors LLC for this engagement, as discussed in Section VIII.C below.
E. Scienter / Intent Defense
FERC Staff bears the burden of demonstrating scienter — that DPT acted with intent to deceive or manipulate, or with reckless disregard of a known obligation. This is the most demanding element of FERC's anti-manipulation rule, and it provides a significant potential avenue of defense.
If DPT's traders — Renfro and Petrov — acted pursuant to established internal trading strategies, followed written trading policies and procedures, and received supervisory approval from Derek Sung for the trading activity at issue, the argument for knowing or intentional manipulation becomes more difficult for Staff to sustain. The existence of a documented portfolio optimization strategy, approved by supervisory personnel, would support the inference that the traders acted in good faith pursuant to a legitimate business strategy, rather than with the intent to deceive or defraud the market.
However, we must candidly acknowledge the risks associated with this defense. In prior manipulation cases, FERC Staff has relied extensively on internal communications — particularly emails, instant messages, and recorded trader phone conversations — to establish scienter. Even if the formal trading policies and procedures supported the portfolio optimization defense, informal communications by Renfro, Petrov, or Sung may reveal statements reflecting awareness that the strategy was designed to exploit congestion for FTR profits, or expressing satisfaction that the strategy was generating profits through artificial congestion. Such communications, if they exist, could be devastating to the scienter defense.
This makes the document review process critically important. We must identify, review, and assess all internal communications by Renfro, Petrov, Sung, and other relevant trading desk personnel during the Relevant Period before we can fully evaluate the viability of the scienter defense. The results of this review may significantly alter our assessment of the case and the appropriate strategy.
F. Cooperation and Remedial Measures as Mitigation
Even if the substantive defenses discussed above do not fully negate FERC Staff's manipulation theory, significant penalty mitigation is available under the FERC Penalty Guidelines based on cooperation and remedial measures. The key factors include:
• CCO Appointment: Dunmore hired Jennifer Caulfield as Chief Compliance Officer on February 6, 2023 — before the end of the Relevant Period and before the investigation commenced. This demonstrates proactive, good-faith compliance efforts that were not motivated by the investigation, and FERC has historically given credit for such pre-investigation compliance improvements.
• Full Cooperation: Dunmore has expressed through Martin Llewellyn its willingness to cooperate fully with the FERC investigation, including producing documents on a rolling basis and making employees available for testimony under 18 C.F.R. § 1b.12. Full cooperation can yield a significant downward adjustment in the culpability score under the Penalty Guidelines.
• Pre-Existing Compliance Program: If DPT can demonstrate that it maintained a pre-existing compliance program that was reasonably designed to prevent and detect violations of the Federal Power Act and FERC regulations, this can provide additional mitigation credit. We have not yet evaluated the adequacy of DPT's compliance program under the Guidelines criteria and will need to do so promptly.
• Enhanced Compliance Program: As part of any resolution, Dunmore could propose a comprehensive enhanced compliance program that goes beyond the minimum requirements, including enhanced trading surveillance, expanded compliance training, independent compliance auditing, and organizational structure changes to improve compliance oversight. This type of proactive commitment has historically been viewed favorably by FERC Staff and the Commission.
• Self-Reporting: Dunmore did not self-report the conduct to FERC, which limits the maximum available mitigating credit. Under the Penalty Guidelines, self-reporting before the violation is discovered by the Commission or the IMM can yield the most significant mitigating credit. The absence of self-reporting will be a factor in Staff's penalty analysis, though it is partially offset by Dunmore's cooperation and remedial efforts.
VII. Prior Counsel Conflict — Aldercroft & Beane LLP
Dunmore's prior FERC regulatory counsel was Aldercroft & Beane LLP, a Washington, D.C.-based energy regulatory boutique led by Warren Aldercroft, Named Partner. Aldercroft & Beane's offices are located at 1875 K Street NW, Suite 600, Washington, D.C. 20006. The firm had previously handled DPT's FERC market-based rate filings (Docket No. ER05-1128-000), tariff compliance matters, and routine regulatory communications with the Commission.
Aldercroft & Beane was conflicted out of the enforcement proceeding due to concurrent representation of another MISO market participant that is also currently under FERC OE investigation in a separate, unrelated docket. The nature of the conflict is such that Aldercroft & Beane cannot represent DPT's interests in the enforcement proceeding while simultaneously representing the other market participant in a related investigation, as the two representations could give rise to conflicting obligations and strategic considerations.
The conflict was identified in late May 2023, after Martin Llewellyn initially consulted with Aldercroft & Beane upon receipt of the May 22 preliminary inquiry letter. Mr. Aldercroft promptly notified Mr. Llewellyn of the conflict, and Mr. Llewellyn subsequently engaged Calderwood & Harkness. We completed our firm-wide conflict check on May 23, 2023, and confirmed that no conflicts exist with respect to DEH, DPT, DMP, their principals (including Gavin Harcourt), equity investors (Pendleton Capital Partners, LP and Greenvale Infrastructure Fund III), any identified personnel, or FERC. The Firm was formally engaged on May 24, 2023.
We note that Aldercroft & Beane possesses significant institutional knowledge regarding DPT's FERC filings, regulatory history, market-based rate authorization, and compliance program. This knowledge could be valuable to our defense, particularly with respect to DPT's market-based rate authorization and the regulatory framework governing its MISO market participation. We should coordinate with Martin Llewellyn regarding any common-interest or information-sharing arrangements with Aldercroft & Beane, subject to the ethical constraints arising from the conflict. Any such arrangement would need to be structured carefully to ensure that information shared with or received from Aldercroft & Beane does not create inadvertent conflicts or compromise the interests of either the Aldercroft & Beane client or Dunmore.
VIII. Key Information Gaps and Investigative Priorities
A. Document Collection and Review
The highest immediate priority is implementing the litigation hold directive issued on May 25, 2023, through Martin Llewellyn and Rhonda Vasquez, and commencing the systematic collection and review of electronically stored information ("ESI") from the eleven (11) identified custodians.
Key Custodians:
1. Kyle Renfro — Senior Trader, MISO Day-Ahead Desk
2. Anastasia Petrov — Trader, MISO Real-Time Desk
3. Derek Sung — SVP, Power Marketing & Trading
4. Rhonda Vasquez — VP, Regulatory Affairs
5. Jennifer Caulfield — Chief Compliance Officer