PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Alan Ngo, Hannah Brinkley, Patrick Gallagher
FROM: Catherine Bloom
DATE: October 5, 2023
RE: Analysis of FERC Staff Preliminary Findings — Docket No. IN23-7-000; Dunmore Energy Holdings Ltd. and Dunmore Power Trading LLC
C&H Matter No.: 1016-00004
Billing Code: 71420.00001
I. Purpose and Executive Summary
The purpose of this memorandum is to analyze the Preliminary Findings letter issued by the staff of the Federal Energy Regulatory Commission's Office of Enforcement ("FERC Staff" or "Staff") on October 2, 2023, to evaluate the relative strengths and weaknesses of Staff's position and Dunmore's available defenses, and to recommend a comprehensive strategy for the preparation of a formal Response to Preliminary Findings and for settlement positioning in advance of the meeting scheduled with FERC Enforcement leadership on October 10, 2023.
The Preliminary Findings letter sets forth Staff's conclusions that Dunmore Power Trading LLC ("DPT"), a wholly-owned subsidiary of Dunmore Energy Holdings Ltd. ("DEH" and, together with DPT, "Dunmore"), engaged in market manipulation in violation of Section 222 of the Federal Power Act ("FPA"), 16 U.S.C. § 824v, and the Commission's Anti-Manipulation Rule, 18 C.F.R. § 1c.2, 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"). Staff's theory centers on an alleged three-part cross-product manipulation scheme involving uneconomic Day-Ahead generation offers at the Indiana Hub, coordinated virtual transactions at the Minnesota Hub, and gas nomination practices through Dunmore Midstream Partners LP ("DMP") designed to support the uneconomic offers.
Staff demands a total monetary resolution of $30.8 million, consisting of an $18 million civil penalty assessed under the FERC Penalty Guidelines and $12.8 million in disgorgement of alleged unjust profits attributable to the scheme. This represents a significant demand that, in our assessment, substantially exceeds what the facts and applicable precedent warrant.
Our initial assessment is that Staff's position, while possessing certain factual underpinnings — most notably the statistical correlation evidence and certain trader communications — is vulnerable on multiple fronts. Dunmore possesses strong defenses, particularly regarding: (a) the legitimate portfolio optimization rationale for the Day-Ahead bidding strategy; (b) the temporal disconnect between FTR acquisition and the alleged manipulative conduct; (c) the speculative nature of Staff's unjust profits calculation, which is fundamentally undermined by Dr. Leonard Whitfield's preliminary analysis attributing the relevant congestion patterns to documented transmission outage events; and (d) significant mitigating factors, including Dunmore's extensive cooperation, the proactive appointment of a Chief Compliance Officer before the investigation commenced, and the absence of any prior enforcement history.
Based on this assessment, the matter is well-positioned for a negotiated resolution substantially below Staff's initial demand. We believe a settlement in the range of $3 million to $5 million in civil penalty, with no disgorgement component, is achievable and represents the optimal outcome when balanced against the substantial litigation risks and costs associated with a contested proceeding before an Administrative Law Judge.
As noted, a meeting with FERC Enforcement leadership — including Margaret Hollowell (Director, Division of Investigations), Kwame Adebayo (Deputy Director), and Christine Pham (Senior Attorney) — is scheduled for October 10, 2023. This memorandum is intended to inform preparation for that meeting, as well as the broader strategic decision-making by Dunmore's legal team and senior management.
II. Background and Procedural History
This investigation originated with a referral from MISO's Independent Market Monitor. On April 3, 2023, Velthorn Market Analytics, Inc. ("Velthorn"), acting in its capacity as the MISO Independent Market Monitor under the direction of its President, Dr. Patricia Engel, issued a referral letter to FERC's Office of Enforcement ("OE"). The Velthorn referral flagged what Dr. Engel characterized as anomalous bidding patterns by DPT at the Indiana Hub and Minnesota Hub pricing nodes, noting a persistent statistical correlation between DPT's Day-Ahead generation offers and the profitability of DPT's Financial Transmission Rights ("FTR") portfolio. The referral included Velthorn's preliminary statistical analysis of the bidding patterns spanning the approximate fourteen-and-a-half-month Relevant Period.
Following receipt of the Velthorn referral, FERC OE initiated a preliminary review and issued a preliminary inquiry letter to DPT, dated May 22, 2023. The letter requested initial information regarding DPT's trading activities at the Indiana Hub and Minnesota Hub, DPT's FTR holdings, and DPT's compliance policies and procedures applicable to energy trading.
Dunmore retained Calderwood & Harkness LLP ("C&H") on May 24, 2023, two days after receipt of the preliminary inquiry letter. A retainer in the amount of $250,000 was received on May 30, 2023. C&H filed a Notice of Appearance with the Commission on behalf of DEH and DPT on June 5, 2023.
On June 12, 2023, the Commission issued a formal non-public order of investigation under Docket No. IN23-7-000, pursuant to 18 C.F.R. Part 1b, authorizing FERC Staff to conduct a full investigation into DPT's trading activities in the MISO markets during the Relevant Period. The order designated the investigation as non-public in accordance with the Commission's standard practice under Section 1b.9 of the Commission's regulations.
Staff served its first data request on June 26, 2023, consisting of forty-one (41) interrogatories and twenty-three (23) document requests. The requests were broad in scope, covering DPT's energy trading strategies, bidding practices, FTR acquisition and management, virtual transaction activity, internal communications among trading personnel, risk management policies and procedures, compensation structures for traders, and related matters. DPT completed its first document production on July 24, 2023, producing 48,200 documents, including trading records, internal e-mails, instant messages, and policy documents.
Staff served a second, supplemental data request on August 7, 2023, consisting of eighteen (18) supplemental interrogatories focused on the relationship between Day-Ahead bidding and FTR positions, the role of gas nominations through DMP, and the supervisory structure within DPT's trading operations. DPT completed its second document production on August 21, 2023, producing an additional 63,400 documents. The cumulative document production through the second production totaled 111,600 documents.
A third and final production, consisting of approximately 75,400 documents, remains pending and is anticipated for completion on or about October 30, 2023. Upon completion of the third production, the cumulative production will total approximately 187,000 documents, comprising approximately 1.24 million pages, drawn from eleven (11) custodians across DEH, DPT, and DMP.
FERC OE conducted investigative testimony of three DPT employees under 18 C.F.R. § 1b.12 during September 2023:
•  Kyle Renfro, Senior Trader, MISO Day-Ahead Desk — testimony taken September 5, 2023;
•  Anastasia Petrov, Trader, MISO Real-Time Desk — testimony taken September 12, 2023; and
•  Derek Sung, Senior Vice President, Power Marketing & Trading — testimony taken September 19, 2023.
All three witnesses were represented by C&H counsel during their testimony. Each testified under oath and subject to the penalties of perjury. The testimony transcripts were provided to C&H and are available for review. As discussed in detail below, Staff's Preliminary Findings letter relies selectively on portions of this testimony to support its allegations.
In anticipation of the need for expert economic analysis to rebut Staff's market impact modeling, C&H engaged Dr. Leonard Whitfield of Whitfield Economic Advisors LLC on July 10, 2023. Dr. Whitfield is a recognized energy markets economist with extensive experience in FERC enforcement matters and has previously served as an expert witness in multiple Commission proceedings. Dr. Whitfield is currently preparing a comprehensive expert economic analysis; however, the full report has not yet been completed. Preliminary results from Dr. Whitfield's analysis are discussed in this memorandum and are critical to the assessment of Dunmore's defensive posture.
FERC Staff issued its Preliminary Findings letter on October 2, 2023. The letter was signed by Margaret Hollowell, Director of the Division of Investigations, and Christine Pham, Senior Attorney. The Preliminary Findings letter represents Staff's formal statement of conclusions following the investigative phase and constitutes the predicate for settlement discussions or, in the absence of a resolution, a potential Order to Show Cause.
III. Summary of FERC Staff's Allegations and Findings
A. The Alleged Manipulative Scheme
Staff's Preliminary Findings letter identifies what it characterizes as a three-part manipulative scheme orchestrated by DPT personnel during the Relevant Period of January 3, 2022 through March 17, 2023 — a span of approximately fourteen and a half months. The three components of the alleged scheme are described below.
1. Uneconomic Day-Ahead Bidding
The first and central component of Staff's theory involves DPT's Day-Ahead generation offers at the Indiana Hub pricing node. Staff alleges that Kyle Renfro, in his capacity as Senior Trader on DPT's MISO Day-Ahead Desk, submitted Day-Ahead offers for Dunmore's gas-fired generation units at prices significantly below the marginal cost of generation. According to Staff's analysis, these offers ranged as low as negative $15 per megawatt-hour ("MWh") to negative $40/MWh, far below the variable cost of dispatching the relevant units.
Staff contends that the purpose of these below-cost offers was not to secure economic dispatch of the units but rather to create artificial congestion patterns on the MISO transmission system. Specifically, Staff alleges that Renfro's bidding was designed to influence Day-Ahead Locational Marginal Prices ("LMPs") and congestion components at the Indiana Hub in a manner that would benefit DPT's existing Financial Transmission Rights positions. Because FTR values are derived from the congestion component of LMPs, the artificially depressed offers at the Indiana Hub — if they indeed moved congestion patterns — would enhance the revenue associated with DPT's FTR portfolio.
Staff's analysis identifies approximately 2,840 gigawatt-hours ("GWh") of allegedly uneconomic Day-Ahead offers submitted by Renfro over the Relevant Period. The FTR positions that allegedly benefited from the resulting congestion patterns had a notional value of approximately $47.3 million, representing a substantial financial interest in the outcome of the congestion dynamics at issue.
2. Cross-Product Manipulation
The second component of Staff's theory involves DPT's virtual transaction activity at the Minnesota Hub pricing node. Staff alleges that Anastasia Petrov, a Trader on DPT's MISO Real-Time Desk, submitted Increment Offers ("INCs") and Decrement Bids ("DECs") at the Minnesota Hub that were designed to amplify the congestion differential created by Renfro's uneconomic Day-Ahead bids at the Indiana Hub. The interplay between physical offers at one node and virtual transactions at another node is the hallmark of the cross-product manipulation theory that Staff advances.
Staff identifies approximately 1,620 GWh of virtual transactions submitted by Petrov at the Minnesota Hub during the Relevant Period. According to Staff, these virtual positions were not placed on the basis of independent market views regarding price differentials between the Day-Ahead and Real-Time markets but were instead timed and sized to reinforce the congestion patterns initiated by Renfro's Day-Ahead offers.
Staff's cross-product theory is supported in significant part by the economic analysis of Dr. Samuel Breck, a Senior Economist in FERC OE's Division of Analytics and Surveillance. Dr. Breck's analysis demonstrates a statistically significant correlation between the timing, sizing, and direction of Renfro's Day-Ahead offers at the Indiana Hub and Petrov's virtual transactions at the Minnesota Hub. Staff asserts that this correlation, combined with internal communications between the two traders (discussed below), evidences a coordinated cross-product strategy designed to manipulate congestion for the benefit of DPT's FTR positions.
3. Physical-Financial Coordination
The third component of Staff's theory addresses the role of gas nominations through Dunmore Midstream Partners LP ("DMP"), a related entity within the Dunmore corporate family. Staff alleges that DPT coordinated the timing and volume of gas nominations through DMP to support the uneconomic generation offers, effectively masking the true marginal cost of the gas-fired units.
Specifically, Staff contends that the gas nominations were tailored to create the appearance that the marginal cost of fuel for the generation units was lower than it actually was, thereby providing a superficial economic justification for the deeply negative Day-Ahead offers. Staff argues that this coordination between DPT and DMP reveals the artificial nature of the bidding strategy and further undermines any claim that the offers were economically rational when viewed at the individual unit level.
B. Staff's Unjust Profits Calculation
Staff's Preliminary Findings letter sets forth its estimate of the unjust profits attributable to the alleged manipulative scheme. The unjust profits calculation was performed by Dr. Breck and estimates that DPT derived $12.8 million in unjust profits over the Relevant Period.
Dr. Breck's methodology employs a "but-for" market simulation. In essence, the analysis compares actual market outcomes — including actual FTR revenues and virtual transaction profits — with a counterfactual scenario in which DPT's allegedly manipulative bidding at the Indiana Hub is removed from the MISO market-clearing model. The difference between the actual FTR revenues and the modeled FTR revenues absent DPT's uneconomic bidding, combined with the profits from Petrov's virtual transactions at the Minnesota Hub, yields the $12.8 million unjust profits estimate.
The but-for methodology is standard in FERC enforcement actions involving market manipulation, but as discussed in Section V.D below, it is inherently dependent on numerous assumptions about counterfactual market conditions, and those assumptions are highly contestable. The sensitivity of the model to input assumptions creates significant vulnerability in Staff's disgorgement calculation.
C. Staff's Penalty Calculation
Staff applies the FERC Penalty Guidelines framework, as revised in 2022, to derive its proposed civil penalty. The calculation proceeds as follows:
Staff assesses a base penalty of $9 million. The base penalty is derived from Staff's assessment of the seriousness level of the alleged violation, considering the nature of the cross-product scheme (involving physical generation, FTRs, and virtual transactions), the market impact of the conduct as estimated by Dr. Breck, and DPT's trading volume and overall financial scale. Staff notes that DPT's MISO trading volume in calendar year 2022 was 18.4 million MWh and that DPT reported fiscal year 2022 revenue of $614 million, placing DPT among the more significant market participants in the MISO footprint.
Staff then applies a duration and scope multiplier of 2x to the base penalty, on the basis that the alleged scheme spanned over fourteen months and involved multiple products (physical generation offers, Financial Transmission Rights, and virtual transactions) across two distinct pricing nodes (Indiana Hub and Minnesota Hub). This multiplier results in a proposed civil penalty of $18 million ($9 million × 2).
Staff's total monetary demand is the sum of the $18 million civil penalty and the $12.8 million disgorgement, for a total of $30.8 million.
Notably, Staff provides no mitigating credit in its penalty calculation for Dunmore's cooperation, remedial measures, or the absence of prior violations. This is a significant point of contention, as discussed in Section VII.C below.
D. Testimony Evidence Relied Upon by Staff
Staff's Preliminary Findings letter relies substantially on portions of the investigative testimony taken during September 2023.
With respect to Kyle Renfro's testimony on September 5, 2023, Staff cites specific passages in which Renfro acknowledged his awareness of the inverse relationship between his Day-Ahead bidding and the profitability of DPT's FTR portfolio. Staff characterizes these passages as evidence that Renfro understood that below-cost offers would drive congestion patterns benefiting the FTR positions and that he submitted the offers with this understanding. Staff emphasizes that Renfro's awareness of the relationship between physical and financial positions is central to establishing the scienter element required under the anti-manipulation rule.
With respect to Anastasia Petrov's testimony on September 12, 2023, Staff cites Petrov's statements indicating that she received direction from Renfro regarding the timing of her virtual positions at the Minnesota Hub. Staff uses this testimony to establish the coordination element of the cross-product theory — that the Day-Ahead and Real-Time strategies were not independently developed but were part of a unified plan to influence congestion patterns for the benefit of DPT's FTR portfolio.
With respect to Derek Sung's testimony on September 19, 2023, Staff cites Sung's statements regarding his general awareness of the trading strategy employed by Renfro and Petrov. While Sung's testimony includes statements supportive of the portfolio optimization rationale (discussed further below), Staff argues that Sung's supervisory oversight was inadequate because he did not specifically monitor the interrelationship between Day-Ahead offers and FTR profitability. Staff characterizes this as a failure of supervisory controls that enabled the alleged manipulation to persist for over fourteen months.
In addition to the testimony, Staff references internal communications produced during the document production — including e-mails and instant messages between Renfro and Petrov — discussing congestion forecasts, FTR position valuations, and the expected impact of bidding strategies on congestion patterns. Staff presents these communications as documentary evidence of the coordinated manipulative intent underlying the scheme.
IV. Assessment of FERC Staff's Position — Strengths
It is important to acknowledge candidly the areas in which Staff's position is strong or will be difficult to challenge. A realistic assessment of these strengths is essential to calibrating Dunmore's defensive strategy and settlement positioning.
A. Pattern Evidence
Staff has assembled strong statistical evidence of a persistent and consistent correlation between DPT's Day-Ahead offers at the Indiana Hub and the profitability of DPT's FTR portfolio over the full 14.5-month Relevant Period. Dr. Breck's analysis demonstrates that days on which Renfro submitted the most aggressively negative Day-Ahead offers corresponded with the highest FTR returns, and this pattern held with a high degree of statistical significance across the entire Relevant Period.
The volume of allegedly uneconomic offers (approximately 2,840 GWh) and virtual transactions (approximately 1,620 GWh) is both substantial and sustained. Unlike some enforcement matters in which the alleged manipulative conduct is concentrated in a narrow window — making it plausible to attribute the behavior to isolated judgment errors — the duration and consistency of the pattern here present a more formidable challenge for the defense. The persistence of the pattern over more than fourteen months is a fact that any adjudicator or settlement negotiator will find significant.
B. Trader Communications
The internal communications between Renfro and Petrov, produced as part of the document production, present a meaningful evidentiary challenge. While these communications are susceptible to the alternative interpretation that they reflect routine information-sharing between colleagues on different trading desks — an interpretation we intend to advance — they nonetheless provide Staff with some evidence of coordination between the Day-Ahead and Real-Time strategies. Several messages include explicit references to congestion forecasts, expected FTR revenues, and the anticipated impact of bidding on price spreads.
Moreover, Petrov's testimony that she received timing direction from Renfro regarding her Minnesota Hub virtual positions lends direct testimonial support to Staff's cross-product coordination narrative. While Petrov's testimony also contains statements that can be read as consistent with routine inter-desk communication, the specific acknowledgment of direction from Renfro is a fact that cannot be dismissed.
C. Negative Offer Pricing
Day-Ahead offers as low as negative $40/MWh are facially uneconomic when assessed on a unit-level basis. While the portfolio optimization defense (discussed in Section V.A) provides an economically rational explanation for negative offers, the offers themselves create a strong initial impression of uneconomic behavior that any audience — whether FERC Commissioners, an ALJ, or even appellate judges — will find concerning on first impression. The burden to explain why a market participant would offer generation at deeply negative prices is a practical reality that Dunmore must overcome.
Staff's below-marginal-cost analysis, comparing the Day-Ahead offer prices to the estimated variable cost of generation (inclusive of fuel, variable operations and maintenance, and emissions costs), is contestable — particularly on the question of what constitutes the appropriate cost benchmark — but it provides a framework that is intuitive and accessible to decision-makers. Rebutting this analysis requires engagement with complex portfolio economics that may not translate easily to a non-specialist audience.
D. Velthorn Market Analytics Referral
The fact that this investigation originated with an independent referral from Velthorn Market Analytics, MISO's Independent Market Monitor, rather than from a competitor complaint or a whistleblower with potential bias, lends significant credibility to the existence of the anomalous bidding patterns that are the foundation of Staff's case. Dr. Patricia Engel and Velthorn are well-regarded in the industry and at the Commission; their analysis carries substantial weight.
An ALJ or the Commission itself would likely afford considerable deference to Velthorn's identification of the anomalous patterns, even if Velthorn's referral does not constitute a finding of manipulation. The independent origin of the investigation limits one of the defense strategies sometimes available in enforcement matters — namely, arguing that the investigation was initiated based on unreliable or biased information.
E. FERC Precedent
Staff cites several prior FERC enforcement actions involving similar cross-product manipulation schemes in which market participants submitted uneconomic physical offers or schedules while holding FTR or virtual positions that profited from the resulting congestion or price impacts. The Commission has consistently found such conduct to constitute manipulation under Section 222 of the FPA and 18 C.F.R. § 1c.2, and has imposed substantial penalties.
While each enforcement matter is factually distinct, and the precedents cited by Staff are distinguishable on various grounds (as we will argue in the Response to Preliminary Findings), the body of precedent does establish a framework in which the type of conduct alleged here — cross-product coordination between physical and financial positions — is within the heartland of the Commission's anti-manipulation enforcement program. This precedential backdrop informs the settlement dynamics and limits the degree to which Dunmore can argue that Staff's theory is novel or unprecedented.
V. Assessment of Dunmore's Defenses — Strengths
Despite the strengths identified in Staff's position, Dunmore has a number of robust defenses available, several of which are capable of substantially undermining Staff's theory and, critically, Staff's unjust profits and penalty calculations.
A. Portfolio Optimization Defense
The strongest defense available to Dunmore is the portfolio optimization rationale for the Day-Ahead bidding strategy. DPT's Day-Ahead offers, including offers at negative prices, were part of a legitimate portfolio optimization strategy designed to maximize the total value of Dunmore's integrated generation portfolio, rather than to maximize the profitability of individual generation units in isolation.
This defense is grounded in established industry practice for vertically integrated generation owners and marketers that hold both physical generation assets and financial instruments (including FTRs and virtual positions) tied to the performance of those assets. Portfolio optimization recognizes that the economic value of a generation unit cannot be assessed in isolation from the other positions in the portfolio, and that offers that appear uneconomic on a unit-level basis may be entirely rational when viewed in the context of the portfolio as a whole.
In Dunmore's case, the gas-fired generation units at issue had contractual minimum generation obligations that required the units to remain dispatched during certain periods regardless of prevailing market prices. The negative Day-Ahead offers reflected the opportunity cost of curtailment — that is, the cost that DPT would have incurred if the units were not dispatched, including contract penalties, start-up and re-start costs, and the loss of ancillary service revenue — rather than an artificial price suppression strategy.
This defense is supported by contemporaneous documentation in the produced record, including internal risk management memoranda, portfolio optimization models, and contractual provisions governing the minimum generation obligations. It is further supported by the testimony of Derek Sung, who described the portfolio optimization framework in his September 19, 2023 testimony.
We anticipate that Dr. Whitfield's expert report will provide a rigorous economic analysis demonstrating that DPT's bidding was consistent with a rational portfolio optimization strategy and that the negative offers were within the range of economically justifiable conduct when assessed on a portfolio basis.
B. FTR Acquisition Timing
A significant factual element that undermines Staff's coordinated-scheme theory is the timing of DPT's FTR acquisitions. The FTR positions that Staff identifies as benefiting from the alleged manipulation were acquired months before the Relevant Period commenced on January 3, 2022. These FTR positions were acquired through MISO's annual and monthly FTR auctions as part of DPT's routine hedging activities, consistent with DPT's standard practice of acquiring FTRs to hedge congestion risk associated with its physical generation and load positions.
The temporal disconnect between the acquisition of the FTR positions (prior to the Relevant Period) and the commencement of the allegedly manipulative Day-Ahead bidding (beginning January 3, 2022) fundamentally undermines Staff's contention that the FTR positions and the bidding strategy were components of a unified manipulative scheme. If the FTR positions were acquired as part of routine hedging activity before the alleged scheme was conceived, the inference that the bidding strategy was designed to benefit the FTRs is substantially weakened.
FTR auction records, bid and offer data, and internal approvals documenting the acquisition of the relevant FTR positions have been produced in the document production and support this timeline. We will prominently feature this evidence in the Response to Preliminary Findings.
C. Transmission Outage Causation
Perhaps the most critical rebuttal to Staff's unjust profits calculation is the analysis being developed by Dr. Leonard Whitfield of Whitfield Economic Advisors LLC. Dr. Whitfield's preliminary analysis — which, although not yet finalized in report form, is sufficiently developed to inform our strategic assessment — indicates that the congestion patterns at the Indiana Hub during the Relevant Period were primarily driven by documented transmission outage events on the MISO system, rather than by DPT's Day-Ahead bidding behavior.
Specifically, Dr. Whitfield has identified a series of planned and forced transmission outages on key facilities in the Indiana Hub area during the Relevant Period that independently explain the congestion patterns that Staff attributes to DPT's bidding. When these transmission outages are properly accounted for in the but-for market simulation, the estimated market impact of DPT's bidding is dramatically reduced.
Dr. Whitfield's preliminary estimate of the actual market impact attributable to DPT's bidding is no more than $2.1 million — compared to Staff's $12.8 million unjust profits figure. This represents an 84% reduction in the estimated unjust profits and, if sustained, would fundamentally undermine both the disgorgement component of Staff's demand and the base penalty calculation (which is in part derived from Staff's assessment of market impact).
We consider this to be one of the most powerful tools in Dunmore's defensive arsenal. The credibility and rigor of Dr. Whitfield's analysis will be central to both the settlement negotiations and any potential litigation.
D. Speculative Disgorgement
Closely related to the transmission outage causation defense is the broader argument that Staff's $12.8 million unjust profits figure is inherently speculative. The but-for market simulation employed by Dr. Breck requires numerous assumptions about what market conditions would have prevailed absent DPT's bidding — including assumptions about how other market participants would have bid, how MISO's market-clearing engine would have dispatched generation, and how congestion patterns would have developed on the transmission system. Each of these assumptions introduces uncertainty into the model, and the cumulative effect of the contested assumptions is a wide range of possible outcomes rather than a single reliable estimate.
Dr. Whitfield's analysis identifies several specific methodological issues with Dr. Breck's model, including:
•  Failure to account for the documented transmission outage events discussed above, which independently explain a substantial portion of the congestion patterns at issue;
•  Failure to incorporate weather-related demand variations during the Relevant Period, which affected load patterns and congestion dynamics;
•  Inadequate treatment of third-party bidding patterns at the Indiana Hub and Minnesota Hub, including bids by other generators and virtual traders that independently influenced LMPs and congestion; and
•  Sensitivity analysis deficiencies — Dr. Breck's analysis does not include robust sensitivity testing to evaluate the range of possible outcomes under alternative assumptions.
FERC precedent recognizes that disgorgement amounts must be based on a reasonable estimate of unjust profits and that the Commission may waive or significantly reduce disgorgement where the profits are speculative or unquantifiable with sufficient certainty. We will rely on this precedent in the Response and in settlement negotiations to argue for elimination or substantial reduction of the disgorgement component.
E. Mitigating Factors
Dunmore benefits from several significant mitigating factors that Staff's Preliminary Findings letter conspicuously fails to acknowledge or credit:
Cooperation. Dunmore has cooperated fully and extensively with Staff's investigation from its inception. DPT has produced 111,600 documents to date, with the total expected to reach approximately 187,000 documents (approximately 1.24 million pages) from eleven custodians upon completion of the third production anticipated on October 30, 2023. Dunmore has made three employees — Renfro, Petrov, and Sung — available for investigative testimony under oath, and has indicated its willingness to make up to three additional witnesses available if requested by Staff, for a potential total of six witnesses. At no point has Dunmore refused or delayed a production request, sought to limit the scope of Staff's data requests beyond reasonable objections, or otherwise obstructed Staff's investigation.
Remedial Measures. DPT hired Jennifer Caulfield as its Chief Compliance Officer on February 6, 2023 — more than three months before FERC's preliminary inquiry letter was issued on May 22, 2023, and more than four months before the formal order of investigation on June 12, 2023. The Caulfield appointment was a proactive remedial step taken by Dunmore's management in recognition of the need to strengthen the company's compliance infrastructure, and it demonstrates that Dunmore identified and began to address compliance weaknesses on its own initiative, independent of any regulatory directive. This is precisely the type of proactive remediation that the FERC Penalty Guidelines are designed to reward.
No Prior Violations. Neither DEH nor DPT has any prior FERC enforcement history. The company has never been the subject of an Order to Show Cause, has never been assessed a civil penalty by the Commission, and has never been named as a respondent in a FERC enforcement proceeding. This clean record warrants significant mitigating credit under the Penalty Guidelines framework.
Pre-Existing Compliance Program. DPT maintained a pre-existing compliance program addressing energy trading and market conduct requirements. While the program admittedly did not specifically address cross-product manipulation risks or FTR-related trading conduct — a gap that Dunmore has moved to remedy through the Caulfield appointment and the development of an enhanced compliance plan — the existence of a pre-existing program demonstrates a baseline commitment to compliance that distinguishes Dunmore from entities that operated without any compliance infrastructure.
F. Testimony Nuances
While Staff's Preliminary Findings letter relies selectively on portions of the September 2023 trader testimony, the full testimony record includes exculpatory statements that provide important counternarrative material for the defense.
Kyle Renfro's testimony includes statements that his Day-Ahead bidding was always reviewed by DPT's risk management function before submission, indicating that the bidding was subject to an internal control process rather than being the product of unchecked discretion. Renfro also testified regarding the portfolio optimization rationale for negative offers, including the contractual minimum generation obligations.
Derek Sung's testimony includes detailed descriptions of the portfolio optimization framework employed by DPT, the business rationale for maintaining dispatch of the gas-fired units even at negative offer prices, and the organizational structure of DPT's risk management and compliance functions. These portions of Sung's testimony support the defense narrative that the bidding strategy was a legitimate business decision, not a manipulative scheme.
Even Petrov's testimony, while including the acknowledgment of timing direction from Renfro, also contains statements consistent with routine inter-desk information sharing and coordination that is standard practice in energy trading operations with multiple desks covering different products and markets. The full context of Petrov's testimony is more nuanced than Staff's selective citations suggest.
VI. Assessment of Dunmore's Defenses — Weaknesses
A candid assessment requires identification of the areas in which Dunmore's defenses are weaker or more difficult to sustain. These weaknesses must be factored into the settlement calculus and addressed proactively in the Response to Preliminary Findings.
A. Renfro-Petrov Communications
Certain internal communications between Renfro and Petrov present the most significant documentary challenge for the defense. While we believe these communications are susceptible to alternative, benign interpretations consistent with routine information-sharing between trading desk colleagues, some of the messages are susceptible to Staff's interpretation that they evidence coordinated manipulative intent.
In particular, several communications include references to expected congestion profits that, when extracted from the broader context of portfolio management discussions and read in isolation, suggest that Renfro and Petrov were aware that below-cost Day-Ahead offers would enhance FTR returns and that they structured their respective trading activities with this objective in mind. While awareness of the relationship between physical and financial positions is not inherently manipulative — indeed, any competent trader would be aware of portfolio dynamics — Staff will argue that the specificity of these communications goes beyond general awareness and reflects a deliberate strategy to manipulate congestion for profit.
We will need to address these communications directly in the Response to Preliminary Findings, providing the full context in which they were sent and alternative interpretations consistent with legitimate trading activity. We should also consider whether Renfro or Petrov can provide declarations or supplemental testimony addressing the context of specific communications.
B. Compliance Program Gaps
While the existence of a pre-existing compliance program is a mitigating factor, the fact that the program did not specifically address cross-product manipulation risks or FTR/virtual position monitoring is a meaningful weakness. Staff's argument that DPT was operating in a space with known manipulation risks — as evidenced by the Commission's prior enforcement actions involving cross-product schemes — without specific compliance controls addressing those risks undermines the argument that DPT's trading was conducted within robust compliance guardrails.
Additionally, while Caulfield's appointment as CCO on February 6, 2023, is a significant mitigating factor, it also implicitly acknowledges that the prior compliance program was deficient. Staff may argue that the Caulfield hire demonstrates that Dunmore's own management recognized the inadequacy of the existing controls, which in turn supports the inference that the trading activity occurred in an environment with insufficient oversight.
We should frame this issue carefully in the Response, acknowledging the compliance enhancement while positioning it as evidence of Dunmore's proactive commitment to continuous improvement rather than as an admission of prior failure.
C. Sung's Supervisory Role
Derek Sung's testimony, while generally supportive of the portfolio optimization rationale, contained acknowledgments that he did not specifically review or monitor the relationship between Day-Ahead offers and FTR positions on a day-to-day basis. Staff characterizes this as inadequate supervisory oversight and argues that Sung's failure to scrutinize the interplay between physical and financial positions allowed the alleged manipulation to continue for over fourteen months without detection or intervention.
This aspect of Sung's testimony is difficult to fully mitigate. While Sung's role as Senior Vice President involved oversight of the broader trading operation rather than daily review of individual positions, the acknowledgment that he did not specifically review the Day-Ahead/FTR relationship creates a supervisory gap that Staff will exploit. In the Response, we should contextualize this by describing the organizational structure of DPT's trading operation, the division of responsibilities between senior management and desk-level risk management, and the existence of other oversight mechanisms (including the risk management review that Renfro described in his testimony).
D. Volume and Duration
The 14.5-month duration of the allegedly manipulative conduct and the high volume of transactions involved — approximately 2,840 GWh in Day-Ahead offers and 1,620 GWh in virtual transactions — make it substantially more difficult to characterize the conduct as isolated, inadvertent, or the product of a brief lapse in judgment. Staff will argue that a scheme of this duration and magnitude could not have persisted without deliberate intent and organizational awareness.
This factor limits the effectiveness of certain defenses that might be available in a shorter-duration matter, such as characterizing the conduct as a misunderstanding of market rules or an isolated error. The Response will need to address the duration head-on, arguing that the persistence of the strategy is consistent with a legitimate portfolio optimization approach that DPT reasonably believed was compliant, rather than evidence of a prolonged manipulative scheme.
VII. Analysis of FERC Penalty Guidelines Application
A. Base Penalty Calculation
Staff's $9 million base penalty is derived from its assessment of the seriousness level of the alleged violation, taking into account the nature of the cross-product scheme (involving physical and financial products), the estimated market impact, and DPT's financial scale. Staff notes DPT's fiscal year 2022 revenue of $614 million and DEH's consolidated revenue of $3.82 billion, EBITDA of $891 million, and U.S. net generation capacity of 4,280 MW. Staff also cites DPT's MISO trading volume of 18.4 million MWh in 2022.
Our assessment is that the base penalty appears inflated relative to comparable cases. In the Response, C&H should argue for a lower seriousness level based on the following considerations:
•  The actual market impact, as estimated by Dr. Whitfield, is no more than $2.1 million — substantially lower than Staff's $12.8 million estimate and more appropriately reflected in a lower seriousness level;
•  The conduct did not result in physical reliability events, supply shortages, or harm to end-use consumers — factors that the Penalty Guidelines identify as increasing seriousness;
•  The alleged scheme, even accepting Staff's characterization, was directed at congestion and price differentials rather than at inflating overall energy prices, and thus represents a narrower market impact than schemes that affect wholesale energy prices broadly; and
•  DPT's trading volume and financial scale, while relevant under the Guidelines, should not be overweighted in the seriousness assessment, as the relevant metric is the scale of the alleged manipulation relative to the overall market, not the overall size of the entity.
A more appropriate base penalty, in our assessment, would be in the range of $2 million to $3 million, reflecting a lower seriousness level and a more accurate estimate of market impact.
B. Duration/Scope Multiplier
Staff applies a 2x multiplier to the base penalty, citing the 14.5-month duration of the alleged scheme and the multi-product scope (physical generation, FTRs, and virtual transactions across two pricing nodes). The resulting $18 million penalty ($9 million × 2) represents the high end of the multiplier range under the FERC Penalty Guidelines.
Our assessment is that while the multiplier falls within the range authorized by the Guidelines, it is aggressive and not warranted by the facts. A 1.5x multiplier — or no multiplier at all — would be more appropriate given the following considerations:
•  Dunmore's extensive cooperation and proactive remediation should offset the duration and scope factors that Staff relies upon for the elevated multiplier;
•  The multi-product scope reflects the integrated nature of DPT's portfolio and the portfolio optimization strategy, not a deliberate effort to multiply the manipulative impact across different products; and
•  The duration of the conduct is consistent with a sustained business strategy that DPT reasonably believed to be compliant, not with a scheme that was deliberately concealed or extended to maximize manipulative profits.
C. Mitigating Credit
One of the most significant deficiencies in Staff's penalty calculation is the complete absence of any mitigating credit for Dunmore's cooperation, self-reporting, remedial measures, or clean enforcement history. The FERC Penalty Guidelines expressly provide for downward adjustments based on these factors, and the failure to apply any mitigating credit is both inconsistent with the Guidelines' framework and inconsistent with the Commission's practice in comparable cases.
Dunmore's cooperation has been exemplary: complete document production (111,600 documents to date, 187,000 expected), three employees made available for investigative testimony with up to three more offered, and no production delays or objections beyond routine scope negotiations. The proactive appointment of Jennifer Caulfield as CCO on February 6, 2023 — before any regulatory inquiry — is a remedial step that the Guidelines specifically identify as warranting mitigating credit. The absence of any prior enforcement history for either DEH or DPT is an additional mitigating factor that Staff ignores entirely.
In the Response, we should argue forcefully that these factors warrant at minimum a 30% to 50% mitigating reduction in any penalty, and potentially more. This argument is supported by FERC precedent in which the Commission has applied substantial mitigating credit for cooperation and remediation in comparable enforcement matters.
D. Disgorgement Analysis
The $12.8 million disgorgement component of Staff's demand is additive to the $18 million civil penalty and is based entirely on Dr. Breck's unjust profits estimate. As discussed in Sections V.C and V.D above, Dr. Whitfield's rebuttal analysis — estimating actual market impact at no more than $2.1 million — is a critical tool for challenging this figure.
FERC precedent recognizes that disgorgement serves a remedial purpose, and the Commission has stated that disgorgement amounts must be based on a reasonable and supportable estimate of the unjust profits actually derived from the manipulative conduct. Where the profits are speculative, uncertain, or unquantifiable with sufficient confidence, the Commission has the discretion to waive disgorgement entirely or to reduce it to reflect only those profits that can be established with reasonable certainty.
In the settlement context, we believe that a complete waiver of disgorgement is achievable, particularly if Dr. Whitfield's analysis demonstrates that the congestion patterns at issue were primarily driven by transmission outages rather than DPT's bidding. If Staff insists on some disgorgement component, a figure in the range of $0 to $1 million — reflecting the lower end of Dr. Whitfield's market impact estimate — would be the maximum that should be accepted.
VIII. Recommended Strategy
A. Response to Preliminary Findings
We recommend preparing a comprehensive formal written Response to Preliminary Findings, analogous to a Wells submission in the SEC context, targeting submission by November 6, 2023. The Response should be a substantial document presenting Dunmore's complete defense and positioning the matter for either a favorable settlement or, if necessary, a strong defensive posture in any post-Order-to-Show-Cause proceeding.
The Response should address the following key themes:
1.  Portfolio Optimization Defense. The Response should present the portfolio optimization defense in detail, with supporting documentation including contractual minimum generation obligations, internal risk management protocols, portfolio optimization models, and FTR acquisition records. The defense should demonstrate that DPT's negative Day-Ahead offers were economically rational when assessed on a portfolio basis and were consistent with legitimate industry practice for vertically integrated generation owners.
2.  Expert Economic Analysis. The Response should submit Dr. Whitfield's expert report, or if the full report is not yet available, a preliminary summary of Dr. Whitfield's conclusions with a commitment to submit the full report promptly thereafter. The expert analysis should challenge Dr. Breck's unjust profits calculation on the grounds discussed above, including the transmission outage causation analysis, the speculative nature of the but-for simulation, and the methodological deficiencies in Dr. Breck's model. Targeted completion for the full report is November 20, 2023; accordingly, a detailed preliminary summary should be submitted with the Response on November 6, 2023, with the full report to follow on or about November 20, 2023.
3.  Mitigating Credit. The Response should argue forcefully for significant mitigating credit under the FERC Penalty Guidelines, citing Dunmore's cooperation, remedial measures, clean enforcement history, and pre-existing compliance program. The Response should document each of these factors in detail and argue that the appropriate penalty, after mitigating credits, is substantially below Staff's demand.
4.  Disgorgement Challenge. The Response should challenge the disgorgement calculation as speculative and urge waiver or substantial reduction based on Dr. Whitfield's analysis and applicable FERC precedent.
5.  Remediation and Compliance Enhancement. The Response should emphasize Dunmore's ongoing remedial efforts, including the February 2023 appointment of Jennifer Caulfield as CCO and the planned comprehensive enhanced compliance program (to be developed in partnership with Ridgeway Compliance Solutions LLC, as discussed below).
B. Settlement Positioning
In parallel with the preparation of the formal Response, we recommend developing a settlement strategy targeting the following parameters:
Target settlement range: $3 million to $5 million in civil penalty, with no disgorgement component. This range represents a reduction of approximately 84% to 90% from Staff's initial $30.8 million demand and, in our assessment, reflects a fair outcome given the strength of Dunmore's defenses, the vulnerability of Staff's unjust profits calculation, and the mitigating factors available.
Walk-away point: Dunmore's walk-away threshold should be approximately $6 million total, consisting of penalty only with no disgorgement. Beyond this level, the escalation risk of proceeding to an Order to Show Cause and ALJ hearing must be seriously weighed against the financial and reputational costs of litigation. As discussed in Section VIII.C below, an ALJ proceeding would be costly, protracted, and carry significant reputational risk.
Enhanced Compliance Plan. A critical component of any settlement proposal should be the offer of a comprehensive thirty-six (36) month enhanced compliance plan. We recommend engaging Ridgeway Compliance Solutions LLC, under the direction of its President, Dr. Carolyn Whitford, to design and oversee the compliance program. Dr. Whitford is a recognized expert in energy trading compliance and has been accepted by FERC in prior consent agreements as a compliance monitor. The Ridgeway engagement letter is currently being finalized and is targeted for execution on October 15, 2023, at a flat fee of $385,000. The enhanced compliance plan will address the specific gaps identified in DPT's pre-existing program, including cross-product manipulation risk monitoring, FTR/virtual position surveillance, trader communication policies, and supervisory controls.
Resolution language. We recommend proposing "neither admit nor deny" resolution language, which is standard in FERC consent agreements and avoids the admission of violations that could have collateral consequences for Dunmore's other regulatory filings, financing arrangements, and commercial relationships.
October 10 meeting. We recommend using the October 10, 2023 meeting with FERC Enforcement leadership (Hollowell, Adebayo, and Pham) to accomplish two objectives: (1) to signal Dunmore's willingness to resolve the matter constructively through negotiation, and (2) to preview the strength of Dunmore's defenses, including the portfolio optimization rationale, the FTR acquisition timing, and the preliminary conclusions of Dr. Whitfield's analysis. The meeting should set the tone for productive settlement discussions while making clear that Dunmore is fully prepared to contest Staff's Preliminary Findings if necessary.
C. Litigation Risk Assessment
In the event that settlement negotiations do not produce an acceptable resolution, the matter would proceed through the issuance of an Order to Show Cause by the Commission, followed by a hearing before an Administrative Law Judge under the Commission's procedures.
The litigation path carries significant financial and reputational risks:
Cost. We estimate that ALJ litigation would require additional legal fees of approximately $2 million to $4 million beyond the current engagement, reflecting the substantial discovery, briefing, hearing preparation, testimony, and post-hearing briefing that such a proceeding would entail. This is in addition to the approximately $1.5 million to $2.8 million in total C&H fees estimated through resolution of the matter at the current settlement-oriented posture.
Duration. ALJ proceedings in FERC enforcement matters typically require eighteen (18) to twenty-four (24) months from the issuance of an Order to Show Cause to the hearing and initial decision, with additional time for exceptions, Commission review, and potential judicial appeal. A contested proceeding could extend resolution of this matter to late 2025 or even 2026.
Reputational Risk. Unlike the current non-public investigation under Part 1b, post-Order-to-Show-Cause proceedings are public. The filing of a public Order to Show Cause alleging market manipulation would be disclosed in Dunmore's regulatory filings and would be available to the public, including media, industry participants, and counterparties. This poses significant reputational risk to Dunmore, particularly vis-à-vis its equity investors. Pendleton Capital Partners, LP, which holds a 27% equity stake in DEH (Managing Partner: Richard Ostrander), and Greenvale Infrastructure Fund III, which holds a 19% equity stake (Managing Director: Susan Tanaka), would be directly affected by the negative publicity associated with a public manipulation allegation.
Market-Based Rate Authorization. Additionally, a public enforcement action alleging market manipulation could jeopardize DEH's market-based rate authorization (Docket No. ER05-1128-000). The Commission's market-based rate regulations require that sellers demonstrate they do not possess or have not exercised market power. A finding of market manipulation could trigger a review of DEH's market-based rate authorization, with potentially severe consequences for Dunmore's ability to sell power at market-based rates in wholesale markets.
Assessment. Settlement is strongly preferable to litigation. The risk/reward calculus clearly favors a negotiated resolution in the $3 million to $5 million range. Even at the high end of the recommended settlement range ($5 million), the financial outcome would be substantially better than the expected value of a litigated resolution, considering the probability-weighted range of potential penalties, the costs of litigation, and the reputational and regulatory consequences of a public proceeding.
D. Expert Report Timeline
Dr. Whitfield's full expert report is expected for completion in mid-to-late November 2023, with a target date of approximately November 20, 2023. Given the November 6, 2023 target for submission of the Response to Preliminary Findings, we recommend the following approach to the expert evidence:
•  Submit a detailed summary of Dr. Whitfield's preliminary conclusions with the Response on November 6, 2023. The summary should address the transmission outage causation analysis, the critique of Dr. Breck's methodology, and the $2.1 million maximum market impact estimate.
•  Submit the full expert report on or about November 20, 2023, as a supplement to the Response. This approach is consistent with FERC practice and allows Dunmore to present its full expert analysis while meeting the Response deadline.
Expert fees incurred to date total approximately $125,000, based on Dr. Whitfield's hourly rate of $475. Total expected expert fees through completion of the report and potential testimony are approximately $312,500.
E. Document Production Completion
The third and final document production, consisting of approximately 75,400 documents, is targeted for completion on or about October 30, 2023. Upon completion, the cumulative production will total approximately 187,000 documents, comprising approximately 1.24 million pages drawn from eleven custodians.
Completing the third production before the submission of the Response to Preliminary Findings on November 6, 2023 is strategically important. A complete document production will strengthen Dunmore's cooperation narrative and will eliminate any argument by Staff that the investigation is still ongoing or that Dunmore has withheld relevant information.
E-discovery costs through Crestline Document Solutions LLC, which is handling the document collection, processing, hosting, and production, total approximately $347,000 to date.
IX. Financial Impact Summary
The following table summarizes the key financial parameters of the matter as currently assessed:
The foregoing estimates reflect the costs associated with a settlement-oriented resolution. In the event the matter proceeds to ALJ litigation, estimated additional legal fees of $2 million to $4 million would be incurred, and expert, compliance, and e-discovery costs would likely increase materially as well.
X. Immediate Next Steps
The following action items should be prioritized in the near term:
1.  October 10 Meeting Preparation. Complete preparation for the October 10, 2023 meeting with FERC Enforcement leadership, including Margaret Hollowell (Director, Division of Investigations), Kwame Adebayo (Deputy Director), and Christine Pham (Senior Attorney). Prepare a presentation outline previewing Dunmore's defenses and signaling settlement willingness.
2.  Ridgeway Compliance Solutions Engagement. Finalize the engagement of Ridgeway Compliance Solutions LLC (Dr. Carolyn Whitford) for design and oversight of the enhanced 36-month compliance program. Target execution date for the engagement letter: October 15, 2023. Flat fee: $385,000.
3.  Third Document Production. Complete the third and final document production of approximately 75,400 documents through Crestline Document Solutions LLC. Target completion: October 30, 2023.
4.  Response to Preliminary Findings. Draft the formal Response to Preliminary Findings for submission to FERC Staff by November 6, 2023. Assign primary drafting responsibility and establish internal review milestones.
5.  Expert Report Coordination. Coordinate with Dr. Leonard Whitfield on the expert report timeline, confirm the preliminary summary for inclusion with the November 6 Response, and ensure the full report is completed by November 20, 2023.
6.  Management and Board Briefing. Brief Dunmore senior management and the DEH Board of Directors — specifically Gavin Har