PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
MEMORANDUM
June 10, 2023
FROM: Catherine Bloom, Partner Calderwood & Harkness LLP 1001 Fannin Street, Suite 4200 Houston, TX 77002
TO: Gavin Harcourt, Founder, Chairman & Chief Executive Officer, Dunmore Energy Holdings Ltd. Elena Mirova, President & Chief Operating Officer, Dunmore Energy Holdings Ltd. Martin Llewellyn, General Counsel, Dunmore Energy Holdings Ltd.
RE: Overview of FERC Office of Enforcement Investigation Process — Docket No. IN23-7-000
C&H Matter No.: 1016-00004 Billing Code: 71420.00001
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 been prepared at the direction of Martin Llewellyn, General Counsel of Dunmore, in anticipation of litigation and for the purpose of providing legal advice in connection with the pending investigation. Accordingly, this memorandum is protected by the attorney-client privilege and the work product doctrine, and its contents should not be disclosed to any person or entity outside the limited distribution list identified above without the prior written approval of Calderwood & Harkness LLP ("Calderwood & Harkness" or "C&H").
As the Dunmore leadership team is aware, FERC's Office of Enforcement issued a preliminary inquiry letter to Dunmore on May 22, 2023, seeking information regarding certain trading activities of DPT in the Midcontinent Independent System Operator, Inc. ("MISO") energy markets. On June 5, 2023, Calderwood & Harkness filed a notice of appearance on behalf of both DEH and DPT with FERC, formally entering its representation in this matter. Based on the trajectory of recent communications with FERC Staff, a formal non-public order of investigation is anticipated in the very near term. (We note that this order was ultimately issued on June 12, 2023, under Docket No. IN23-7-000, two days following the date of this memorandum.)
The purpose of this memorandum is to explain each phase of the FERC enforcement process from preliminary inquiry through resolution, to identify the applicable legal framework and the specific statutory and regulatory provisions at issue, to describe Dunmore's rights and obligations throughout the investigative process, to outline the range of potential outcomes (including settlement, contested proceedings, and closure without action), and to provide a preliminary assessment of Dunmore's financial exposure under FERC's civil penalty framework. This memorandum is designed to enable informed decision-making by Dunmore's leadership as the investigation proceeds and to establish a common foundation of understanding from which strategic decisions can be made.
This memorandum does not constitute legal advice as to the merits of any particular defense or the likelihood of any particular outcome. Calderwood & Harkness will provide supplemental memoranda and oral briefings addressing substantive legal and strategic issues as the investigation progresses and as additional facts are developed through the internal review.
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 dated April 3, 2023. The referral was submitted under the direction of Velthorn's President, Dr. Patricia Engel, a well-known figure in wholesale electricity market monitoring who has led the MISO IMM function since 2016. The referral letter, which is non-public and which Calderwood & Harkness has not yet reviewed, is understood to flag certain bidding patterns by DPT in the MISO Day-Ahead and Real-Time energy markets during the period from approximately January 2022 through March 2023. IMM referrals to FERC are a common mechanism by which potential market manipulation is identified, and the IMM has both the authority and the responsibility under the MISO tariff to make such referrals when it identifies conduct that may be inconsistent with competitive market behavior.
Second, and apparently independent of the IMM referral, FERC's own Division of Analytics and Surveillance ("DAS") identified trading anomalies attributable to DPT through its ongoing market surveillance program. The DAS utilizes sophisticated quantitative tools to monitor trading patterns across all Commission-jurisdictional wholesale electricity markets, and it routinely identifies statistical outliers or patterns of conduct that warrant further review. We understand that Senior Economist Dr. Samuel Breck, who leads the relevant surveillance team within DAS, was instrumental in flagging the DPT trading activity for further investigation by the Division of Investigations.
The convergence of an IMM referral and an independent DAS identification of the same trading activity is significant. It suggests that the bidding patterns at issue were sufficiently anomalous to be identified through multiple analytical lenses, which in turn suggests that FERC Staff is likely to approach this investigation with a heightened level of scrutiny and conviction regarding the existence of potential violations.
On May 22, 2023, FERC OE issued a preliminary inquiry letter to Dunmore, formally initiating the matter from Dunmore's perspective. The preliminary inquiry letter identified the general scope of the investigation and requested that Dunmore voluntarily provide certain categories of information.
B. The Alleged Conduct Under Investigation
Based on the preliminary inquiry letter and initial communications with FERC Staff, the investigation focuses on DPT's trading activity at two MISO pricing nodes — the Indiana Hub and the Minnesota Hub — during the period from January 3, 2022 through March 17, 2023 (the "Relevant Period," encompassing approximately fourteen and one-half months of trading activity). The investigation appears to center on three related but distinct categories of alleged conduct, each of which is described below.
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 marginal cost of generation — including fuel costs, variable operations and maintenance expenses, and start-up costs — was substantially higher. The economic theory underlying this allegation is that DPT's purpose in submitting these below-cost offers was not to make money on the energy sales themselves, but rather to create artificial congestion patterns on the MISO transmission system. By injecting large volumes of uneconomically priced energy at the Indiana Hub, DPT could allegedly influence the locational marginal prices ("LMPs") at that node and, more importantly, the congestion component of LMPs between the Indiana Hub and other nodes. Critically, FERC Staff believes that DPT simultaneously held Financial Transmission Rights ("FTRs") that would profit from the resulting congestion patterns — meaning that DPT's losses on the uneconomic generation offers would be more than offset by gains on the FTR positions.
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 to arbitrage between Day-Ahead and Real-Time prices, and they can influence the dispatch of physical resources and the clearing of Day-Ahead prices. The allegation is that DPT's virtual positions at the Minnesota Hub were not economically motivated on a standalone basis, but rather were designed to work in concert with the uneconomic Day-Ahead offers at the Indiana Hub to maximize the congestion differential between the two nodes, thereby increasing the value of DPT's FTR positions. This cross-product coordination — across physical generation, virtual transactions, and FTRs — is the type of multi-layered scheme that FERC has historically targeted in its most significant enforcement actions.
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 the true marginal cost of the generation units and provide an apparent economic rationale for what were, in substance, loss-making generation offers. If substantiated, this aspect of the alleged scheme would demonstrate a sophisticated level of coordination across multiple business units and could constitute an additional basis for finding that the trading activity was part of a deliberate manipulative scheme rather than a series of independent, arm's-length commercial decisions.
The key personnel identified in connection with the trading activity include: Kyle Renfro, who served as Senior Trader on DPT's MISO Day-Ahead Desk during the Relevant Period; Anastasia Petrov, a Trader on DPT's MISO Real-Time Desk; and Derek Sung, Senior Vice President of Power Marketing & Trading, who supervised the fourteen-trader MISO desk throughout the Relevant Period and had overall responsibility for DPT's MISO trading strategy. Additional personnel may be identified as the investigation progresses.
The volume metrics referenced in the preliminary inquiry letter are substantial. FERC Staff has identified approximately 2,840 gigawatt-hours ("GWh") in allegedly uneconomic Day-Ahead generation offers at the Indiana Hub; FTR positions with a total notional value of approximately $47.3 million; and approximately 1,620 GWh in virtual transactions at the Minnesota Hub. These volumes, taken together, suggest that the alleged conduct involved a significant portion of DPT's MISO trading book over the fourteen-and-one-half-month Relevant Period and will require extensive factual and economic analysis to assess.
C. Applicable Legal Framework
The legal framework governing this investigation and the potential enforcement action includes the following key 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, 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 Act of 1934 and Rule 10b-5 thereunder, which prohibit securities fraud. FERC has interpreted Section 222 broadly to reach a wide range of conduct, including trading schemes that combine physical and financial transactions to create artificial market conditions.
18 C.F.R. § 1c.2 is FERC's anti-manipulation rule, promulgated to implement Section 222. The rule prohibits 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, from: (1) using or employing any device, scheme, or artifice to defraud; (2) making any untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (3) engaging in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity. Importantly, the rule requires a showing of scienter — that is, an intent to deceive, manipulate, or defraud, or reckless disregard of the manipulative nature of the conduct. FERC has stated that evidence of scienter may include, among other things, the uneconomic nature of the trades at issue, contemporaneous communications indicating manipulative intent, the pattern and timing of transactions, and the relationship between physical and financial positions.
18 C.F.R. Part 1b governs FERC's non-public investigation procedures, including the issuance of formal orders of investigation, the use of compulsory process (subpoenas for documents and testimony), and the confidentiality obligations applicable to the investigation. Part 1b establishes the procedural framework within which the investigation will be conducted and defines the rights and obligations of both FERC Staff and investigative subjects.
DPT's Market-Based Rate Authorization. DPT holds market-based rate ("MBR") authority from FERC under Docket No. ER05-1128-000, which permits DPT to sell wholesale electricity at market-determined rates rather than cost-based rates. Market participants with MBR authority are subject to ongoing obligations, including compliance with the Commission's anti-manipulation rules and codes of conduct. A finding that DPT violated Section 222 or Rule 1c.2 could result not only in civil penalties and disgorgement, but also in the revocation or modification of DPT's MBR authority. Revocation of MBR authority would have severe consequences for DPT's ongoing business operations, as it would require DPT to sell wholesale electricity at cost-based rates determined by FERC — a fundamentally different business model that would likely render DPT's current trading operations economically unviable. While revocation of MBR authority is an available remedy, it is rarely imposed in practice and is generally reserved for the most egregious cases.
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 of Investigations within the Office of Enforcement. The preliminary inquiry letter is a non-public communication that notifies the subject that FERC Staff is reviewing certain conduct and requests that the subject voluntarily provide information relevant to the review. The letter typically identifies the general subject matter of the inquiry — in this case, DPT's bidding activity in the MISO Day-Ahead and Real-Time energy markets — without specifying the precise legal theory or the full scope of the conduct under review.
Dunmore received its preliminary inquiry letter on May 22, 2023. Calderwood & Harkness prepared a response on Dunmore's behalf, which was submitted to FERC Staff on June 14, 2023. In that response, Calderwood & Harkness confirmed Dunmore's intent to cooperate with the investigation and requested additional information regarding the scope of the inquiry to facilitate meaningful cooperation.
At the preliminary inquiry stage, cooperation with FERC Staff is technically voluntary. The Commission has not yet issued a formal order of investigation, and accordingly, FERC Staff does not yet possess compulsory process authority (i.e., subpoena power) to compel production of documents or testimony. However, Calderwood & Harkness strongly recommends full cooperation at this stage, and Dunmore has adopted this approach. Refusal to cooperate during the preliminary inquiry phase, or incomplete or delayed cooperation, is treated as a significant aggravating factor under FERC's Penalty Guidelines and can result in higher penalty calculations if a violation is ultimately found. Conversely, prompt and full cooperation — particularly cooperation that goes beyond what is strictly required — is a recognized mitigating factor that can reduce the ultimate penalty amount.
B. Phase 2: Formal Order of Investigation
If FERC Staff determines, based on the preliminary inquiry and its own analysis, that further investigation is warranted, it will recommend that the Commission issue a formal non-public order of investigation pursuant to 18 C.F.R. Part 1b. The order of investigation is a Commission-level directive that authorizes FERC Staff to use compulsory process in conducting the investigation, including the issuance of subpoenas for documents and the compulsion of testimony under oath.
The formal order of investigation is itself non-public. Its existence and contents are confidential under the Commission's regulations, and FERC Staff is prohibited from publicly disclosing the issuance of the order or the scope of the investigation authorized by the order. The subject of the investigation is typically notified of the issuance of the formal order, but the notification is also non-public.
A formal order of investigation is anticipated imminently in this matter. As noted above, the order was subsequently issued on June 12, 2023, under Docket No. IN23-7-000, two days after the date of this memorandum. The issuance of the formal order is a significant procedural milestone, as it marks the transition from a voluntary preliminary inquiry to a formal investigation backed by compulsory process authority. Following the issuance of the formal order, Dunmore's cooperation obligations become more acute, and the scope and intensity of FERC Staff's investigative activity can be expected to increase.
C. Phase 3: Data Requests (Interrogatories and Document Requests)
Following the issuance of the formal order of investigation, FERC Staff will serve one or more sets of data requests on Dunmore. These data requests may take two forms: interrogatories, which require narrative responses under oath or affirmation to specific factual questions; and document requests, which require the production of responsive documents and electronically stored information ("ESI").
Data requests are issued pursuant to the formal order of investigation and carry the force of compulsory process. Failure to comply with a data request — absent a valid objection — can result in enforcement action by the Commission, including petitions to federal court to compel compliance.
Based on the scope of the investigation and Calderwood & Harkness's experience with comparable FERC enforcement matters, Dunmore should expect the first data request to be broad in scope. The initial data request will likely seek, among other things:
•  Complete trading records for DPT's Day-Ahead and Real-Time energy transactions at the Indiana Hub and Minnesota Hub for the Relevant Period;
•  Bidding data, including all offers, bids, and award information, for Dunmore's gas-fired generation units;
•  Records of all FTR acquisitions, holdings, settlements, and mark-to-market valuations during the Relevant Period;
•  Natural gas nomination schedules, pipeline transportation contracts, and gas supply arrangements managed by Dunmore Midstream Partners LP;
•  All communications — including email, instant messages, text messages, Westmark Services Inc. and ICE Chat messages, and recorded telephone line recordings — among and between DPT trading personnel, including Kyle Renfro, Anastasia Petrov, and Derek Sung, as well as any other personnel involved in MISO trading strategy;
•  Internal compliance policies, procedures, manuals, and training materials applicable to DPT's trading operations;
•  Organizational charts reflecting the reporting structure and supervisory relationships within DPT's trading operation;
•  Compensation structures, including base salary, bonus criteria, profit-sharing arrangements, and any incentive-based compensation for trading personnel; and
•  Board minutes, management presentations, and internal memoranda discussing DPT's MISO trading strategy, risk management, and compliance.
Dunmore has the right to object to specific data requests on grounds of relevance, overbreadth, undue burden, or privilege. Privilege objections may be based on the attorney-client privilege (protecting confidential communications between Dunmore and its legal counsel made for the purpose of seeking or providing legal advice) or the work product doctrine (protecting materials prepared in anticipation of litigation). Calderwood & Harkness will prepare and submit all objections and responses on Dunmore's behalf, and will maintain a detailed privilege log documenting any documents withheld on the basis of privilege.
Document productions in FERC enforcement investigations require careful management and coordination. Calderwood & Harkness has engaged Crestline Document Solutions LLC ("Crestline") as the e-discovery vendor for this matter. Crestline will be responsible for processing, hosting, and facilitating the review of responsive documents using its document review platform. All documents collected from Dunmore custodians will be processed by Crestline, loaded into a secure review platform, and reviewed by Calderwood & Harkness attorneys for responsiveness, privilege, and confidentiality designations prior to production to FERC Staff.
Based on the scope of the investigation, Calderwood & Harkness anticipates that Dunmore will need to identify, preserve, collect, and produce documents from multiple custodians across several business units, including trading personnel, operations staff, regulatory affairs, risk management, and senior management. The total volume of potentially responsive documents could number in the tens of thousands to hundreds of thousands of individual documents, depending on the breadth of the data requests and the volume of electronic communications generated by DPT's trading desk during the Relevant Period. Calderwood & Harkness will work closely with Dunmore's internal IT team and records management personnel to ensure that the collection process is comprehensive, defensible, and efficient.
D. Phase 4: Investigative Testimony
FERC Staff has authority under 18 C.F.R. § 1b.12 to require testimony from individuals who possess relevant knowledge regarding the matters under investigation. Investigative testimony in FERC enforcement proceedings is analogous to a deposition in civil litigation, although there are important procedural differences.
Testimony is taken under oath, before a certified court reporter, and is transcribed verbatim. The testimony session is non-public and confidential under the Commission's regulations. Testimony typically occurs at FERC's offices at 888 First Street, N.E., Washington, D.C., although alternative arrangements — including testimony by video conference — may be negotiated with FERC Staff depending on the circumstances.
Dunmore employees who may be called to testify include the traders directly involved in the activity under investigation — Kyle Renfro and Anastasia Petrov — as well as supervisory personnel such as Derek Sung, who had oversight responsibility for the MISO trading desk. FERC Staff may also seek testimony from management-level personnel, compliance officers (including Jennifer Caulfield, Chief Compliance Officer), risk management personnel, and others with knowledge of DPT's trading strategy, compliance policies, or organizational structure. The precise list of witnesses will be determined by FERC Staff based on its review of the documentary record, but Calderwood & Harkness expects that at a minimum Renfro, Petrov, and Sung will be called.
Witnesses who are called to testify have the right to be accompanied by counsel. Calderwood & Harkness will attend all testimony sessions on behalf of Dunmore and its employees. In advance of each testimony session, Calderwood & Harkness will conduct thorough preparation with the witness, reviewing relevant documents, discussing anticipated lines of questioning, and ensuring that the witness understands both the scope of the inquiry and the witness's rights and obligations during the testimony. Testimony preparation sessions will be conducted under the protection of the attorney-client privilege.
It is important that Dunmore's employees understand that they are entitled to have counsel present during any investigative testimony and that they should not agree to provide testimony or informal statements to FERC Staff without first consulting with Calderwood & Harkness. Any unsolicited contact from FERC Staff to Dunmore employees should be reported immediately to counsel.
E. Phase 5: Preliminary Findings Letter
After FERC Staff has completed its investigation — including document review, data analysis, and witness testimony — it will issue a Preliminary Findings letter to the subject of the investigation. The Preliminary Findings letter is a critical document in the enforcement process. It sets forth FERC Staff's factual findings, legal conclusions, and recommended sanctions, including the proposed civil penalty amount and any recommended disgorgement of unjust profits.
The Preliminary Findings letter is analogous to a "Wells notice" in SEC enforcement proceedings. It represents Staff's preliminary view of the case and provides the subject with notice of the charges and sanctions that Staff intends to recommend to the Commission. However, the Preliminary Findings letter is not a final determination; it is a preliminary assessment that is subject to revision based on the subject's response and any subsequent negotiations.
Upon receipt of the Preliminary Findings letter, Dunmore will have the opportunity to submit a detailed written response. The Response to Preliminary Findings is one of the most important advocacy documents in the entire enforcement process. In the response, Calderwood & Harkness will present Dunmore's defenses, challenge Staff's factual findings and legal conclusions where appropriate, identify and argue mitigating factors under the FERC Penalty Guidelines, present rebuttal evidence (including expert economic analysis of market impact and unjust profits), and propose a framework for resolution that is favorable to Dunmore's interests. The response is typically a substantial document, often exceeding fifty pages, and may include expert reports, economic analyses, and other supporting materials.
Calderwood & Harkness will begin preparing the framework for the Response to Preliminary Findings well in advance of receiving the letter, based on its own internal review of the facts and its analysis of the applicable legal standards. This advance preparation is essential to ensuring that Dunmore's response is comprehensive, persuasive, and timely.
F. Phase 6: Settlement Negotiations
Following the submission of the Response to Preliminary Findings, the parties may engage in settlement discussions. Settlement is by far the most common resolution of FERC enforcement investigations, and the vast majority of enforcement matters that proceed beyond the Preliminary Findings stage are resolved through negotiated agreements. Settlement offers significant advantages to both parties: it provides the subject with certainty, avoids the costs and risks of protracted public litigation, and typically results in lower penalties than a contested proceeding; it provides FERC with an efficient resolution and a certain outcome without the need to commit scarce litigation resources to a contested case.
Settlement conferences in FERC enforcement proceedings are typically conducted between Dunmore's counsel (Calderwood & Harkness) and FERC Staff. On the FERC side, the primary negotiating counterparts are expected to be Senior Attorney Christine Pham and other personnel within the Division of Investigations, potentially including meetings with FERC Enforcement leadership, specifically Director Margaret Hollowell, who has final authority over settlement recommendations to the Commission. Settlement discussions may also involve FERC's Chief Administrative Law Judge or other Commission personnel at the direction of the Office of Enforcement.
All settlement negotiations are confidential and are conducted under the protection of "settlement privilege." This means that any positions taken, proposals made, or concessions offered during settlement negotiations cannot be used against either party if settlement is not reached and the matter proceeds to a contested proceeding. This protection is essential to facilitating candid and productive negotiations.
Settlement discussions typically involve multiple rounds of proposals and counter-proposals. FERC Staff will present its initial settlement demand, which typically reflects its assessment of the appropriate penalty and disgorgement amounts based on its application of the Penalty Guidelines. Dunmore, through Calderwood & Harkness, will submit counter-proposals based on its own analysis, including the expert economic analysis of market impact and unjust profits. The parties will then engage in an iterative process of negotiation, which may include in-person meetings, telephone conferences, and written submissions, until either a resolution is reached or the parties determine that settlement is not achievable.
If the parties reach agreement on the terms of a resolution, the settlement will be memorialized in a Stipulation and Consent Agreement, as described in Section IV.A below.
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 common and, in most cases, the most favorable resolution of a FERC enforcement investigation is a Stipulation and Consent Agreement between the subject and FERC Staff. A Consent Agreement is a negotiated settlement that resolves the investigation without a formal adjudication of liability. Based on Calderwood & Harkness's experience, the substantial majority of FERC enforcement matters that proceed to the Preliminary Findings stage are resolved through Consent Agreements.
A typical Consent Agreement includes the following key elements:
Civil Penalty Amount and Payment Terms. The agreement will specify the total civil penalty to be paid by Dunmore, along with the terms and schedule of payment. In some cases, FERC Staff may agree to allow payment in installments over a defined period, particularly where the total penalty amount is substantial.
Disgorgement of Unjust Profits. Where FERC Staff has determined that the subject obtained unjust profits as a result of the manipulative conduct, the Consent Agreement will typically include a disgorgement obligation. Disgorgement is calculated by FERC Staff based on its assessment of the profits attributable to the alleged manipulation and is frequently a subject of significant negotiation.
"Neither Admit Nor Deny" Clause. The standard form of Consent Agreement includes language under which the subject neither admits nor denies the factual allegations set forth in the agreement. This "neither admit nor deny" formulation is critically important from a litigation risk perspective, as it avoids creating admissions that could be used against Dunmore in related civil litigation by private parties (e.g., market participants who claim to have been harmed by the alleged manipulation) or in other regulatory proceedings.
Enhanced Compliance Plan. FERC frequently requires subjects of enforcement actions to implement enhanced compliance measures as a condition of settlement. These measures may include the appointment of an independent compliance monitor (a third-party expert who oversees and reports on the subject's compliance with the terms of the agreement), mandatory training programs for trading and compliance personnel, enhanced trade surveillance and monitoring systems, periodic reporting obligations to FERC Staff, and modifications to organizational structure, supervisory protocols, and compensation arrangements.
Cooperation Commitments. The Consent Agreement may also require Dunmore to cooperate with any related investigations, including providing information and testimony in connection with FERC's investigation of other market participants whose conduct may be related to the activity under review.
Once the parties have agreed to the terms of the Consent Agreement, it is submitted to the full five-member Commission for approval. If the Commission approves the agreement, it issues an order making the agreement public and enforceable. The order approving a Consent Agreement is the first point at which the existence and substance of the investigation become public. The order will be published on FERC's website and in the Federal Register, and it will typically attract attention from industry trade publications, financial media, and other market participants.
A Consent Agreement provides certainty of outcome, avoids protracted and costly public litigation, preserves Dunmore's ability to avoid formal admissions, and typically results in lower penalties than would be assessed in a contested proceeding. Calderwood & Harkness considers a Consent Agreement to be the most likely and, in all likelihood, the most desirable outcome for Dunmore in this matter.
B. Outcome 2: Order to Show Cause
If settlement negotiations are unsuccessful and FERC Staff and Dunmore are unable to reach agreement on the terms of a Consent Agreement, FERC Staff may recommend that the Commission issue an Order to Show Cause. An Order to Show Cause is a formal Commission order that directs the subject to demonstrate why civil penalties and/or disgorgement should not be imposed based on the findings of the investigation.
The issuance of an Order to Show Cause is a significant event for several reasons. First, it initiates a public proceeding, meaning that the existence and substance of the investigation — including the specific allegations of market manipulation — become a matter of public record for the first time. The Order to Show Cause is published on FERC's website, and the allegations contained in the order will be accessible to investors, counterparties, lenders, regulators, and the general public. The reputational consequences of a public Order to Show Cause can be substantial.
Second, the Order to Show Cause triggers formal procedural rights for the subject, including the right to file a written response, the right to request a hearing, and the right to contest the Commission's findings and proposed penalties through formal legal proceedings. Dunmore would have the right to respond to the Order to Show Cause and present its defenses, mitigating factors, and rebuttal evidence. The response would be a public filing.
C. Outcome 3: Administrative Law Judge (ALJ) Proceeding
If Dunmore does not agree to pay the penalty assessed in an Order to Show Cause, the matter may proceed to a contested adjudication. Under Section 316A of the Federal Power Act, if the subject does not consent to the penalty, FERC must file a civil action in United States District Court to affirm and collect the penalty. In such a proceeding, FERC bears the burden of establishing the violation and the appropriateness of the penalty by a preponderance of the evidence, and the subject has the right to a de novo review of the Commission's findings.
Alternatively, in some cases, the Commission may set the matter for hearing before a FERC Administrative Law Judge ("ALJ"). ALJ proceedings are public, formal trial-type hearings conducted pursuant to the Administrative Procedure Act and FERC's Rules of Practice and Procedure (18 C.F.R. Part 385). These proceedings involve the submission of pre-filed testimony, the opportunity for cross-examination of witnesses, the admission of documentary evidence, and post-hearing briefing by both parties.
ALJ proceedings are time-consuming and significantly more costly than settlement. Based on Calderwood & Harkness's experience, ALJ proceedings typically last twelve to twenty-four months from initiation to initial decision, and in complex market manipulation cases, the timeline may be even longer. The costs of an ALJ proceeding include attorney's fees, expert witness fees, document management costs, and the substantial diversion of management time and attention.
An initial decision by the ALJ is subject to review by the full Commission. The Commission may affirm, modify, or reverse the ALJ's findings and recommended sanctions. The Commission's final order is, in turn, subject to judicial review by a United States Court of Appeals pursuant to Section 313 of the Federal Power Act. The entire process, from ALJ proceeding through appellate review, can extend over a period of three to five years.
D. Outcome 4: Closure Without Action
In rare cases, FERC Staff may close an enforcement investigation without recommending any enforcement action. This outcome typically occurs where Staff concludes, after a thorough investigation, that the evidence does not support a finding that the subject violated the Federal Power Act or FERC's anti-manipulation rule. Closure without action may also occur where the evidence establishes that the conduct at issue, while unusual, was economically rational and did not involve the requisite scienter for a manipulation finding.
While Dunmore should be aware of this possibility, Calderwood & Harkness does not consider closure without action to be a probable outcome at this stage. The combination of an IMM referral from Velthorn, independent identification of trading anomalies by FERC's Division of Analytics and Surveillance, and the specific and detailed nature of the allegations set forth in the preliminary inquiry letter all suggest that FERC Staff has already developed a substantial evidentiary foundation for its investigation. This does not mean that Dunmore lacks meritorious defenses — to the contrary, there may be strong arguments regarding the economic rationality of DPT's trading activity and the absence of manipulative intent — but it does mean that closure without action is unlikely to be offered voluntarily by FERC Staff at this stage.
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 Inflation Adjustment Act Improvements Act of 2015. The inflation-adjusted maximum penalty amount is updated annually through a notice published in the Federal Register.
The per-violation-per-day penalty structure is particularly significant in the context of alleged market manipulation schemes that extend over a prolonged period. Each manipulative transaction, each day of manipulative conduct, or each course of conduct may be counted as a separate "violation" for purposes of penalty calculation. In DPT's case, the Relevant Period spans approximately fourteen and one-half months — from January 3, 2022 through March 17, 2023 — encompassing hundreds of trading days. If FERC were to count each trading day as a separate violation, or each individual transaction as a separate violation, the theoretical maximum penalty exposure could be extraordinarily large. In practice, however, FERC does not typically impose penalties at or near the statutory maximum; rather, it applies its Penalty Guidelines to determine a penalty amount that is proportionate to the seriousness of the offense and the culpability of the violator.
B. FERC Penalty Guidelines
FERC adopted its Penalty Guidelines in 2010, modeled closely on the United States Sentencing Guidelines framework used in federal criminal cases. The Penalty Guidelines are codified in FERC's Revised Policy Statement on Penalty Guidelines (130 FERC ¶ 61,220 (2010)). While the Penalty Guidelines are advisory rather than mandatory — FERC retains discretion to deviate from the Guidelines based on the specific facts and circumstances of each case — they provide the analytical framework that FERC Staff uses to calculate recommended penalty amounts, and they are the starting point for all settlement negotiations.
The Penalty Guidelines provide a structured methodology for calculating civil penalties based on several key components:
Base Penalty. The base penalty is determined by the greatest of: (a) the pecuniary gain to the violator resulting from the violation; (b) the pecuniary loss caused to others by the violation; or (c) an amount from the Violation Level Table corresponding to the seriousness of the offense. The pecuniary gain and loss calculations are typically the most significant drivers of the base penalty in market manipulation cases, as they reflect the actual financial impact of the alleged conduct. FERC Staff will calculate these amounts using economic modeling and market data, and the subject has the right to challenge Staff's calculations through its own expert analysis.
Culpability Score. The base penalty is then adjusted based on a culpability score that reflects several factors specific to the violating entity: the size of the organization (measured by the number of employees or other metrics); the involvement of high-level personnel in the violation (including whether officers, directors, or senior management participated in, condoned, or were willfully ignorant of the conduct); the entity's prior history of violations or regulatory infractions; the entity's cooperation with the investigation; and whether the entity self-reported the violation to FERC before the investigation was initiated.
Aggravating Factors. The Penalty Guidelines identify several aggravating factors that can increase the penalty amount, including: the duration and scope of the violation; obstruction of the investigation (including destruction of documents, witness tampering, or failure to preserve evidence); the absence of an effective compliance program; and the failure to take prompt remedial action upon learning of the violation.
Mitigating Factors. Conversely, the Penalty Guidelines identify mitigating factors that can reduce the penalty amount, including: substantial cooperation with the investigation (beyond what is minimally required); the existence of a pre-existing effective compliance program; prompt remedial action taken by the entity to address the violation and prevent recurrence; and self-reporting of the violation to FERC before the investigation was commenced.
It bears repeating that the Penalty Guidelines are advisory and not mandatory. FERC retains discretion to deviate from the Guidelines based on the totality of the circumstances, and there are published precedents in which the Commission has imposed penalties either above or below the range calculated under the Guidelines. Nevertheless, the Guidelines provide the most reliable framework for estimating potential financial exposure and for structuring settlement negotiations.
C. Disgorgement.  In addition to civil penalties, FERC may order disgorgement of "unjust profits" — that is, the profits obtained by the violator as a direct result of the manipulative conduct. Disgorgement is restitutionary in nature; its purpose is to deprive the violator of the financial benefit of the manipulation, rather than to punish the violator. Disgorgement is calculated separately from the civil penalty and is imposed in addition to any penalty amount.
The calculation of unjust profits in market manipulation cases is inherently complex and frequently contested. It requires constructing a "but-for" scenario — that is, an estimate of what market prices, congestion patterns, and FTR values would have been absent the alleged manipulation — and comparing the actual profits earned by the violator to the profits it would have earned under the but-for scenario. The difference represents the unjust profits attributable to the manipulation.
FERC Staff typically develops its disgorgement calculation using economic modeling performed by its own economists and analysts, including personnel in the Division of Analytics and Surveillance. The subject has the right to challenge Staff's disgorgement calculation through its own independent economic analysis, and disgorgement is one of the most heavily negotiated elements of settlement discussions.
Disgorgement calculations depend critically on the assumptions used in the economic model — including assumptions about supply and demand conditions, transmission constraints, generator behavior, and the responsiveness of other market participants to changes in prices and congestion patterns. Calderwood & Harkness anticipates that Staff's disgorgement calculation will be a significant point of contention in this matter and that an independent expert analysis will be essential to rebutting any inflated or methodologically flawed calculations.
D. Estimated Financial Exposure
While it is premature to estimate Dunmore's precise financial exposure with a high degree of confidence, it is appropriate to provide the Dunmore leadership team with a preliminary framework for assessing the magnitude of the potential liability.
Based on the scope of the alleged conduct — approximately 2,840 GWh in uneconomic Day-Ahead generation offers, $47.3 million in FTR notional value, and approximately 1,620 GWh in virtual transactions, sustained over a Relevant Period of approximately fourteen and one-half months — FERC Staff could seek substantial penalties and disgorgement amounts. Under the Penalty Guidelines, penalties for market manipulation schemes of this duration and scope can range from single-digit millions of dollars to tens of millions of dollars, depending on the base penalty calculation, the culpability score, and the applicable aggravating and mitigating factors. In recent comparable cases involving cross-product manipulation schemes in organized wholesale electricity markets, FERC has assessed penalties ranging from approximately $5 million to over $100 million, with the most significant penalties reserved for cases involving the largest volumes, the most egregious conduct, and the most culpable actors.
Disgorgement could be significant depending on FERC Staff's calculation of unjust profits. The $47.3 million in FTR notional value referenced in the preliminary inquiry letter provides a rough upper bound for the potential disgorgement amount, although the actual unjust profits may be substantially lower depending on the assumptions used in the economic modeling and the extent to which DPT's FTR profits can be attributed to the alleged manipulation as opposed to legitimate market factors.
Calderwood & Harkness will retain an independent economic expert — a credentialed economist with experience in wholesale electricity market analysis and FERC enforcement matters — to develop a comprehensive rebuttal analysis of market impact and unjust profits. This expert analysis will be critical to both the Response to Preliminary Findings and the settlement negotiations, as it will provide the evidentiary foundation for challenging Staff's penalty and disgorgement calculations and advocating for a more favorable resolution. Calderwood & Harkness will provide Dunmore with a more refined estimate of financial exposure as the investigation progresses and additional facts are developed.
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 order — such as an Order to Show Cause or an order approving a Consent Agreement. This non-public status is one of the most important features of the FERC enforcement process from the subject's perspective, as it allows the investigation to be conducted and, ideally, resolved without any public disclosure of the allegations or the proceedings.
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 obtained during the investigation. FERC Staff is bound by this confidentiality obligation, and violations are taken seriously by the Commission.
However, it is important to note that the confidentiality protections of Part 1b apply to FERC Staff; they do not impose a binding legal prohibition on the subject of the investigation. As discussed below, Dunmore is not legally prohibited from disclosing the existence of the investigation, but there are compelling practical and strategic reasons to maintain strict confidentiality.
B. Dunmore's Confidentiality Obligations
Although Dunmore is not legally prohibited by FERC's regulations from disclosing the existence of the investigation, Calderwood & Harkness strongly recommends that Dunmore maintain strict confidentiality regarding all aspects of the investigation, including its existence, the nature of the allegations, the scope of the inquiry, and any communications with FERC Staff. Premature or unnecessary disclosure of the investigation could have several adverse consequences:
First, disclosure could adversely affect Dunmore's negotiating position with FERC Staff. The non-public nature of the investigation gives Dunmore the ability to negotiate from a position of relative strength, without the public pressure and reputational consequences that would accompany public disclosure. Once the investigation becomes public, Dunmore loses this advantage.
Second, disclosure could trigger contractual obligations that may exist under Dunmore's agreements with lenders, investors, counterparties, or other business partners. Many commercial contracts contain notification provisions requiring disclosure of material regulatory investigations, and triggering these provisions prematurely could create additional legal and business complications.
Third, public disclosure of a FERC market manipulation investigation could cause significant reputational harm to Dunmore, its subsidiaries, and its management team. Reputational harm can manifest in various ways, including adverse media coverage, loss of customer and counterparty confidence, increased scrutiny from other regulatory agencies, and reduced access to capital markets.
Fourth, public disclosure could potentially complicate Dunmore's ongoing or future trading activity in MISO and other organized wholesale electricity markets, including the Southwest Power Pool ("SPP"), by attracting heightened scrutiny from market monitors and other market participants.
In light of these considerations, Dunmore should limit knowledge of the investigation internally to those individuals with a genuine need to know. At present, Calderwood & Harkness recommends that knowledge of the investigation be confined to the following individuals: Gavin Harcourt (Founder, Chairman & CEO), Elena Mirova (President & COO), Martin Llewellyn (General Counsel), Jennifer Caulfield (Chief Compliance Officer), Rhonda Vasquez (Vice President, Regulatory Affairs), Derek Sung (SVP, Power Marketing & Trading), and such other personnel as may be directly involved in responding to the investigation. Any expansion of the circle of knowledge should be discussed with Calderwood & Harkness in advance.
Dunmore should also consider whether its equity investors — specifically, Pendleton Capital Partners, LP (which holds an approximately 27% equity stake in Dunmore, with Richard Ostrander serving as Managing Partner) and Greenvale Infrastructure Fund III (which holds an approximately 19% equity stake in Dunmore, with Susan Tanaka serving as Managing Director) — have contractual rights to notification of regulatory investigations under the applicable shareholder agreements, investor side letters, or other governing documents. Martin Llewellyn should promptly review these documents and confer with Calderwood & Harkness regarding any notification obligations. If notification is contractually required, it should be provided in a manner that minimizes further dissemination and preserves Dunmore's confidentiality protections to the greatest extent possible.
Additionally, Dunmore's independent auditor, Prescott & Hargrove LLP (engagement partner Douglas Fenn, CPA), may need to be informed of the investigation for purposes of assessing potential contingent liability accruals and financial statement disclosures under applicable accounting standards, including ASC 450 (Contingencies). The timing and scope of any disclosure to the auditor should be coordinated with Calderwood & Harkness to ensure that privilege protections are maintained and that any communications with the auditor are appropriately structured.
C. Communications Protocols
To protect Dunmore's interests and maintain the integrity of the attorney-client relationship, Calderwood & Harkness recommends that Dunmore implement the following communications protocols effective immediately:
External Communications. All communications with FERC Staff should be conducted exclusively through Calderwood & Harkness. No Dunmore employee — including the recipients of this memorandum — should communicate directly with any FERC personnel, including Thomas Adebayo (Lead Investigator), Christine Pham (Senior Attorney), Dr. Samuel Breck (Senior Economist), or any other member of the Office of Enforcement staff, without prior coordination with and approval from Calderwood & Harkness. If any Dunmore employee is contacted directly by FERC Staff, the employee should politely decline to answer any substantive questions, state that Dunmore is represented by counsel, and immediately notify Calderwood & Harkness of the contact.
Internal Communications. All internal communications regarding the investigation — including emails, memoranda, text messages, and any other written or electronic communications — should be marked with the following header: "PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION." This marking will support the assertion of attorney-client privilege over these communications. Additionally, all internal discussions of the investigation should be treated as privileged and should include only those individuals with a need to know.
These protocols are designed to ensure that Dunmore's communications remain protected by the attorney-client privilege and the work product doctrine, and to prevent inadvertent disclosure of privileged information that could waive the privilege.
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 FERC enforcement investigation. The specific nature of the other representation is not known to Calderwood & Harkness, but Aldercroft & Beane, through its named partner Warren Aldercroft, has confirmed that the concurrent representation creates an actual or potential conflict of interest that precludes Aldercroft & Beane from representing Dunmore in this matter.
Following Aldercroft & Beane's notification of the conflict, Dunmore engaged Calderwood & Harkness to serve as lead counsel for all aspects of the enforcement response, including the preliminary inquiry, the formal investigation, any settlement negotiations, and any subsequent contested proceedings. The engagement letter was executed on May 24, 2023, and Calderwood & Harkness filed its notice of appearance with FERC on June 5, 2023.
Calderwood & Harkness has extensive experience representing energy companies in FERC enforcement investigations and has handled numerous matters involving allegations of market manipulation in organized wholesale electricity markets. Catherine Bloom, the lead partner on this engagement, has represented clients in more than a dozen FERC enforcement proceedings and has successfully negotiated favorable consent agreements in several comparable market manipulation matters.
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 compliance program prior to the commencement of the FERC investigation. Most significantly, Dunmore appointed Jennifer Caulfield as Chief Compliance Officer on February 6, 2023 — a date that precedes the April 3, 2023 Velthorn IMM referral and the May 22, 2023 preliminary inquiry letter. The appointment of a dedicated Chief Compliance Officer, and the compliance enhancements that Ms. Caulfield has begun to implement, may serve as a meaningful mitigating factor under the FERC Penalty Guidelines, which recognize the existence of a pre-existing effective compliance program as a basis for reducing penalty amounts. Calderwood & Harkness will work with Ms. Caulfield to document the scope and substance of Dunmore's compliance efforts and to present these efforts in the most favorable light during the enforcement process.
Full Cooperation. Dunmore's full and timely cooperation with the investigation — including the prompt production of responsive documents, making employees available for testimony at FERC Staff's request, and providing timely and complete responses to all data requests — will be critical to achieving a favorable resolution. Cooperation is one of the most important mitigating factors under the FERC Penalty Guidelines, and the difference between "standard" cooperation and "substantial" cooperation can result in a significant reduction in the recommended penalty amount. Calderwood & Harkness will ensure that Dunmore's cooperation is documented and memorialized at each stage of the investigation so that it can be presented effectively during the Response to Preliminary Findings and settlement negotiations.
Independent Economic Expert Analysis. As discussed in Section V above, Calderwood & Harkness anticipates engaging an independent economic expert to analyze the market impact of DPT's trading activity and to develop a rebuttal to FERC Staff's unjust profits calculations. The expert analysis will address, amon