UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Docket No. IN23-7-000
RESPONSE OF DUNMORE ENERGY HOLDINGS LTD. AND DUNMORE POWER TRADING LLC TO FERC STAFF PRELIMINARY FINDINGS
November 6, 2023
FROM:
Catherine Bloom, Partner Calderwood & Harkness LLP 1001 Fannin Street, Suite 4200 Houston, TX 77002 Telephone: (713) 555-4100 Facsimile: (713) 555-4101
Email: cbloom@calderwoodharkness.com
Counsel for Dunmore Energy Holdings Ltd. and Dunmore Power Trading LLC
TO:
Margaret Hollowell Director, Division of Investigations Office of Enforcement Federal Energy Regulatory Commission 888 First Street NE Washington, D.C. 20426
Christine Pham Senior Attorney, Division of Investigations Office of Enforcement Federal Energy Regulatory Commission 888 First Street NE Washington, D.C. 20426
This submission is made on behalf of Dunmore Energy Holdings Ltd. ("DEH") and Dunmore Power Trading LLC ("DPT") (collectively, "Respondents" or "Dunmore") pursuant to 18 C.F.R. Part 1b, in response to the Preliminary Findings letter issued by FERC Staff on October 2, 2023. This Response and its accompanying exhibits are designated as Confidential — Non-Public and are subject to the protections of 18 C.F.R. § 1b.9. Respondents respectfully request that the Commission and its Staff accord this submission and all referenced materials the full protections afforded to non-public investigative materials under the Commission's regulations.
I. INTRODUCTION AND EXECUTIVE SUMMARY
Respondents Dunmore Energy Holdings Ltd. ("DEH") and Dunmore Power Trading LLC ("DPT") respectfully submit this Response to rebut the Preliminary Findings letter dated October 2, 2023 (the "Preliminary Findings"), issued by the Division of Investigations, Office of Enforcement, Federal Energy Regulatory Commission ("FERC" or the "Commission"), in the above-captioned proceeding. For the reasons set forth in detail below, the Preliminary Findings are not supported by the evidentiary record, the legal standards applicable to market manipulation claims, or sound economic analysis. Respondents urge FERC Staff to reconsider the Preliminary Findings and to engage in settlement discussions that reflect the actual evidence assembled during this investigation.
DEH is a Cayman Islands exempted company, with its registered office at 4th Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman, KY1-1002. DEH is a vertically integrated energy holding company with upstream oil and gas production, midstream pipeline assets, and a growing portfolio of wind and solar generation in the U.S. Midwest and Gulf Coast regions. DPT is a Delaware limited liability company and wholly owned power marketing subsidiary of DEH, with its principal U.S. office located at 2200 Post Oak Boulevard, Suite 3100, Houston, Texas 77056. DPT holds market-based rate authority granted by the Commission under Docket No. ER05-1128-000, an authorization it has maintained without incident since 2005. DPT conducts all of Dunmore's wholesale electricity trading in the Midcontinent Independent System Operator ("MISO") and Southwest Power Pool ("SPP") organized wholesale markets.
In its Preliminary Findings, FERC Staff alleges that DPT violated Section 222 of the Federal Power Act, 16 U.S.C. § 824v, and the Commission's anti-manipulation regulation, 18 C.F.R. § 1c.2, in connection with DPT's participation in MISO's Day-Ahead and Real-Time energy markets during the period from January 3, 2022, through March 17, 2023 (the "Relevant Period"), a span of approximately 14.5 months. Specifically, FERC Staff contends that DPT engaged in a multi-pronged manipulative scheme involving: (1) the submission of uneconomic Day-Ahead generation offers at the Indiana Hub pricing node at prices significantly below marginal cost; (2) the execution of Real-Time virtual transactions at the Minnesota Hub pricing node designed to amplify congestion differentials created by the Day-Ahead bids; and (3) the coordination of gas nomination scheduling through an affiliated midstream entity, Dunmore Midstream Partners LP ("DMP"), to support the allegedly uneconomic generation offers and mask the true marginal cost of DPT's gas-fired generation units.
On the basis of these allegations, FERC Staff has demanded a total monetary sanction of $30.8 million, consisting of an $18 million civil penalty (calculated as a base penalty of $9 million doubled by a 2× duration/scope multiplier) and $12.8 million in disgorgement of alleged unjust profits. Staff's economic analysis, prepared by Dr. Samuel Breck, Senior Economist in the Division of Analytics and Surveillance, estimates that DPT earned $12.8 million in unjust profits from the alleged scheme during the Relevant Period.
Respondents submit that the evidence assembled during this investigation — which includes the production of approximately 187,000 documents encompassing roughly 1.24 million pages from 11 custodians, together with sworn testimony provided by six Dunmore employees under 18 C.F.R. § 1b.12 — does not support a finding of market manipulation. To the contrary, the evidentiary record demonstrates that DPT's trading activity during the Relevant Period constituted legitimate portfolio optimization and routine hedging entirely consistent with DPT's obligations as a MISO market participant, MISO's market rules and tariff provisions, and the Federal Power Act.
Respondents advance five principal arguments in this Response, each of which is developed in detail in the sections that follow:
First, DPT's Day-Ahead offers at Indiana Hub reflected a legitimate portfolio optimization strategy designed to maximize returns across DPT's diversified generation portfolio — which includes gas-fired, wind, and solar generation assets — rather than an effort to create artificial congestion for the benefit of Financial Transmission Rights ("FTR") positions. The trading desk's approach was authorized by senior management, documented contemporaneously in internal strategy materials, and consistent with widely accepted industry practice for portfolio participants in organized wholesale markets. Not a single document among the 187,000 produced in this investigation reflects a plan, scheme, or intent to manipulate MISO markets. FERC Staff's attempt to infer manipulative intent solely from trading patterns, without any direct evidence of scienter, is legally insufficient.
Second, the negative Day-Ahead offers at the center of FERC Staff's allegations — ranging from -$15/MWh to -$40/MWh — reflected verifiable, documented opportunity costs and contractual minimum generation commitments under long-term power purchase agreements and reliability must-run obligations. When market conditions made positive-price generation uneconomic for certain units, DPT's negative offers rationally reflected the cost of honoring contractual commitments and avoiding gas imbalance penalties, pipeline penalties, and storage costs associated with gas supply already nominated through DMP. Negative offers are expressly permitted under MISO's tariff, and the Commission has long recognized that such offers can serve legitimate economic purposes. FERC Staff cannot convert a permitted market activity into manipulation without establishing fraudulent intent — which it has not done.
Third, the FTR positions identified in the Preliminary Findings were routine congestion hedging instruments acquired in MISO's annual and monthly FTR auctions well in advance of the Relevant Period. The critical temporal fact that these positions were acquired months before January 3, 2022, fundamentally undermines FERC Staff's theory that they were part of a manipulative scheme. The FTR portfolio was sized and structured consistently with DPT's physical generation and load-serving positions, as is standard industry practice. The Preliminary Findings fail to establish the requisite causal link between DPT's Day-Ahead offers and the congestion patterns from which the FTR positions benefited.
Fourth, the independent economic analysis conducted by Dr. Leonard Whitfield of Whitfield Economic Advisors LLC conclusively demonstrates that the actual market impact of DPT's trading activity was no more than $2.1 million — a fraction of FERC Staff's unsupported estimate of $12.8 million in unjust profits. Dr. Whitfield's analysis, which controlled for the dominant role of planned and forced transmission outage events on congestion patterns at Indiana Hub, reveals that the congestion at issue was driven overwhelmingly by transmission system conditions, not by DPT's bidding. Dr. Breck's analysis for FERC Staff is fundamentally flawed because it fails to control for these exogenous factors, thereby attributing congestion-related FTR returns to DPT's trading behavior without establishing actual causation.
Fifth, Dunmore's extensive cooperation with the investigation and its proactive compliance measures — including the appointment of a Chief Compliance Officer before FERC's preliminary inquiry, the retention of an independent compliance consultant, and the development of a comprehensive 36-month Enhanced Compliance Plan — warrant significant mitigation of any penalty. Dunmore has no prior FERC enforcement actions, violations, or penalties in its nearly two decades of holding market-based rate authority. These factors, individually and collectively, are recognized as substantial mitigating considerations under the Commission's Penalty Guidelines.
This Response is supported by detailed factual analysis, expert economic analysis, and documentary evidence compiled from the investigation record. It is accompanied by an Exhibit Book containing twelve exhibits, indexed and cross-referenced throughout this submission, that provide the supporting materials for Respondents' arguments. Dr. Whitfield's expert report, dated November 20, 2023, has been submitted to FERC Staff contemporaneously with this Response and is attached hereto as Exhibit A.
Respondents respectfully request that FERC Staff reconsider the Preliminary Findings in light of the arguments, evidence, and analysis presented herein. Respondents further request the opportunity to engage in good-faith settlement discussions with FERC Staff to achieve a resolution that appropriately reflects the actual evidence and applicable mitigating factors, rather than the unsupported penalty demand set forth in the Preliminary Findings.
II. BACKGROUND
A. The Respondents
1. Dunmore Energy Holdings Ltd.
Dunmore Energy Holdings Ltd. ("DEH") is a Cayman Islands exempted company (Employer Identification Number 98-1347562) with its registered office at 4th Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman, KY1-1002. DEH is a vertically integrated energy holding company that operates across the energy value chain, with business segments encompassing upstream oil and gas production, midstream pipeline and gathering assets, and a substantial and growing portfolio of power generation facilities located in the U.S. Midwest and Gulf Coast regions. DEH's generation portfolio includes both conventional natural gas-fired generation and renewable energy resources, reflecting the company's strategic commitment to the evolving energy landscape.
DEH is privately held. Equity control of the company is vested in its founder, Gavin Harcourt, who serves as Chairman and Chief Executive Officer. Mr. Harcourt holds a 38% direct equity interest in DEH and an additional 16% interest through the Harcourt Family Trust, giving him an effective controlling interest of 54%. The remaining equity is held by two institutional investors: Pendleton Capital Partners, LP, a private equity fund whose Managing Partner is Richard Ostrander, holds a 27% equity stake; and Greenvale Infrastructure Fund III, an infrastructure-focused investment vehicle whose Managing Director is Susan Tanaka, holds the remaining 19% equity interest.
DEH's key financial metrics for the fiscal year ending December 31, 2022, reflect the scale and scope of its operations. Consolidated revenues were approximately $3.82 billion, and earnings before interest, taxes, depreciation, and amortization ("EBITDA") were approximately $891 million. DEH's U.S. net generation capacity as of year-end 2022 was approximately 4,280 MW, composed of approximately 2,650 MW of natural gas-fired generation, approximately 1,130 MW of wind generation, and approximately 500 MW of solar generation. These figures reflect DEH's position as a meaningful participant in U.S. wholesale electricity markets and underscore the company's substantial investment in both conventional and renewable generation resources.
DEH's senior management team during the Relevant Period and at the time of this submission includes the following key individuals, each of whom has played a role in the company's response to this investigation:
• Gavin Harcourt — Founder, Chairman & Chief Executive Officer
• Elena Mirova — President & Chief Operating Officer
• Martin Llewellyn — General Counsel
• Rhonda Vasquez — Vice President, Regulatory Affairs
• Jennifer Caulfield — Chief Compliance Officer (appointed February 6, 2023)
Ms. Caulfield's appointment as Chief Compliance Officer on February 6, 2023, is particularly noteworthy in the context of this proceeding, as it occurred approximately three and one-half months before FERC's issuance of its preliminary inquiry letter on May 22, 2023, and well before the formal order of investigation was issued on June 12, 2023. As discussed in greater detail in Section VI.B below, Ms. Caulfield's hiring was a proactive step undertaken by Dunmore's leadership to strengthen the company's compliance infrastructure, independent of any regulatory pressure or awareness of a pending investigation.
2. Dunmore Power Trading LLC
Dunmore Power Trading LLC ("DPT") is a Delaware limited liability company (Employer Identification Number 82-4519763) and a wholly owned subsidiary of DEH. DPT's registered agent is Capitol Registered Agents Inc., located at 1209 Orange Street, Wilmington, Delaware 19801. DPT's principal office for business operations is located at 2200 Post Oak Boulevard, Suite 3100, Houston, Texas 77056.
DPT holds market-based rate authorization from the Commission, granted under Docket No. ER05-1128-000. DPT has held this authorization continuously since 2005 and has maintained its market-based rate filings in good standing throughout that period. DPT is the entity through which Dunmore conducts all of its wholesale electricity marketing and trading activities in the MISO and SPP organized wholesale markets. DPT's wholesale power marketing activities are central to the efficient dispatch and commercial optimization of DEH's generation portfolio.
For the fiscal year ending December 31, 2022, DPT's U.S. power marketing revenue was approximately $614 million. DPT's 2022 MISO trading volume was approximately 18.4 million MWh, encompassing physical generation offers, bilateral and exchange-traded transactions, virtual transactions, and FTR positions. DPT's scale of participation in MISO is significant but by no means dominant; DPT is one of hundreds of market participants operating in the MISO region, and its market share, measured by both generation capacity and trading volume, is modest.
During the Relevant Period, DPT's MISO trading desk comprised 14 traders who were responsible for managing the company's day-to-day trading activities across the Day-Ahead and Real-Time markets. The trading desk was supervised by Derek Sung, Senior Vice President for Power Marketing & Trading, who reported to Elena Mirova, President & Chief Operating Officer of DEH. Two traders on the MISO desk are specifically identified in FERC Staff's Preliminary Findings:
• Kyle Renfro — Senior Trader, MISO Day-Ahead Desk. Mr. Renfro was responsible for developing and submitting Day-Ahead generation offers and managing the physical dispatch of DPT's generation assets within MISO. Mr. Renfro provided testimony under oath to FERC Staff on September 5, 2023.
• Anastasia Petrov — Trader, MISO Real-Time Desk. Ms. Petrov was responsible for managing DPT's Real-Time market positions, including virtual transactions (Increment Offers and Decrement Bids). Ms. Petrov provided testimony under oath to FERC Staff on September 12, 2023.
Both Mr. Renfro and Ms. Petrov are experienced energy traders with track records of professional conduct and adherence to applicable market rules. Their testimony, reviewed in its entirety and in context, is consistent with the legitimate portfolio optimization strategy described in this Response.
3. Dunmore Midstream Partners LP
Dunmore Midstream Partners LP ("DMP") is a Delaware limited partnership (Employer Identification Number 47-8831205) and an affiliate of DEH. DMP operates natural gas gathering and pipeline infrastructure in the Midwest region, including gathering systems and interstate pipeline capacity that supply natural gas fuel to certain of DPT's gas-fired generation plants within the MISO footprint.
DMP is relevant to this proceeding because FERC Staff's Preliminary Findings include an allegation of "physical-financial coordination" between DPT and DMP. Specifically, FERC Staff contends that DPT coordinated the timing and volume of gas nominations through DMP's pipeline and gathering infrastructure to support allegedly uneconomic generation offers by DPT and to mask the true marginal cost of DPT's gas-fired generation units. As discussed in detail in Section IV.F below, this allegation is without evidentiary support. DMP's gas nomination and scheduling practices during the Relevant Period were conducted in accordance with standard pipeline scheduling practices and contractual obligations, and were driven by operational requirements rather than any scheme to facilitate or conceal manipulative bidding by DPT.
B. DPT's MISO Market Participation
A proper understanding of the allegations in this proceeding requires a clear picture of DPT's role as a participant in MISO's organized wholesale energy markets. DPT participates actively in both the MISO Day-Ahead and Real-Time energy markets, in accordance with its market-based rate authorization and MISO's applicable tariff provisions, market rules, and business practice manuals.
DPT's generation portfolio within MISO consists of both conventional and renewable energy resources. DPT's gas-fired generation units are located at or near the Indiana Hub pricing node, one of MISO's key commercial pricing points. These units serve as the core dispatchable generation assets in DPT's MISO portfolio, providing the flexibility to respond to market conditions, manage congestion exposure, and meet load-serving obligations. In addition, DPT operates wind and solar generation facilities within the MISO footprint, the output of which is subject to the inherent variability associated with intermittent renewable resources. Managing the interplay between DPT's dispatchable gas-fired resources and its intermittent renewable resources is a central component of DPT's portfolio optimization strategy.
DPT utilizes Financial Transmission Rights ("FTRs") as hedging instruments within MISO. FTRs are financial instruments that entitle the holder to receive revenue (or require the holder to make payments) based on the difference in congestion components of Locational Marginal Prices ("LMPs") between two specified pricing nodes. FTRs are a standard and widely used hedging tool in all organized wholesale markets administered by Regional Transmission Organizations ("RTOs") and Independent System Operators ("ISOs"), including MISO. Market participants with generation and load-serving obligations routinely acquire FTRs to hedge their exposure to transmission congestion costs. DPT's acquisition and holding of FTR positions is entirely consistent with this standard industry practice.
DPT also participates in MISO's virtual transaction markets, utilizing both Increment Offers ("INCs") and Decrement Bids ("DECs") as standard market tools. Virtual transactions serve important functions in organized wholesale markets, including promoting price convergence between the Day-Ahead and Real-Time markets, improving market efficiency, and providing market participants with tools to manage risk and express informed views on expected market conditions. Virtual transactions are expressly authorized under MISO's tariff and are used by a broad range of market participants. DPT's use of virtual transactions during the Relevant Period was consistent with these legitimate market functions.
The two MISO pricing nodes at the center of FERC Staff's allegations are Indiana Hub and Minnesota Hub. Indiana Hub is the location of DPT's gas-fired generation assets and the pricing node at which FERC Staff alleges DPT submitted uneconomic Day-Ahead offers. Minnesota Hub is the pricing node at which FERC Staff alleges DPT's Real-Time virtual transactions were designed to amplify congestion differentials. Both nodes are commercially significant pricing points within MISO, and the congestion path between them is influenced by range factors, including transmission system topology, transmission outage events, load patterns, weather conditions, and the offers and bids of all market participants.
Throughout the Relevant Period and at all other times, DPT has endeavored to comply with MISO's market rules and tariff provisions applicable to its activities as a market participant. DPT's offers, bids, and transactions were submitted through MISO's established market platforms and were subject to MISO's standard market clearing and settlement processes. DPT has not been found by MISO or its Independent Market Monitor to have violated any MISO market rule during the Relevant Period.
C. Procedural History
The procedural history of this investigation is set forth below in chronological detail to provide FERC Staff with a comprehensive record of the events leading to this Response.
April 3, 2023: Velthorn Market Analytics, Inc. ("Velthorn"), which serves as MISO's Independent Market Monitor ("IMM"), issued a referral letter to the FERC Office of Enforcement ("OE"). The referral, authored under the authority of Dr. Patricia Engel, President of Velthorn (located at 900 North Michigan Avenue, Suite 1400, Chicago, Illinois 60611), identified certain bidding patterns by DPT at the Indiana Hub pricing node during the Relevant Period that, in Velthorn's view, warranted further review by FERC OE. The referral letter noted the frequency and magnitude of negative Day-Ahead offers by DPT and the contemporaneous holding of FTR positions on congestion paths involving Indiana Hub. The referral did not conclude that manipulation had occurred; rather, it identified the patterns as potentially warranting investigation.
May 22, 2023: FERC OE issued a preliminary inquiry letter to Dunmore, notifying the company that OE was reviewing DPT's trading activities in MISO and requesting certain information and documents. The preliminary inquiry letter referenced the Velthorn referral and identified the general subject matter of OE's review, including DPT's Day-Ahead offers at Indiana Hub, FTR positions, and virtual transactions at Minnesota Hub.
May 24, 2023: Upon receipt of the preliminary inquiry letter, Dunmore's General Counsel, Martin Llewellyn, initiated the process of retaining outside enforcement counsel. Dunmore's prior FERC regulatory counsel, Aldercroft & Beane LLP (Warren Aldercroft, Named Partner; 1875 K Street NW, Suite 600, Washington, D.C. 20006), was contacted regarding representation in this matter. However, Aldercroft & Beane determined that it was conflicted out of the engagement due to its concurrent representation of another MISO market participant that was the subject of a separate investigation by FERC OE. Dunmore promptly engaged Calderwood & Harkness LLP ("C&H") (C&H Matter Number 1016-00004) to serve as its counsel in this proceeding. Catherine Bloom, Partner in C&H's Energy Regulatory Enforcement practice in Houston, was designated as lead counsel for Respondents.
June 5, 2023: C&H filed a formal notice of appearance in Docket No. IN23-7-000 on behalf of DEH and DPT, identifying Catherine Bloom as counsel of record and providing the relevant contact information.
June 12, 2023: FERC OE issued a formal non-public order of investigation under 18 C.F.R. Part 1b, authorizing the Division of Investigations to conduct a full investigation into the matters identified in the preliminary inquiry letter. The order designated the investigation as non-public in accordance with 18 C.F.R. § 1b.9.
June 26, 2023: FERC OE served its first data request on Respondents, consisting of 41 interrogatories and 23 document requests. The data request sought comprehensive information regarding DPT's MISO trading activities during the Relevant Period, including Day-Ahead offers, FTR positions, virtual transactions, gas nomination schedules, trader communications, internal strategy documents, compliance policies, and related materials. The scope of the request also extended to background information regarding DEH's corporate structure, DPT's trading operations, and DMP's midstream activities.
July 24, 2023: Respondents made their first document production to FERC OE, consisting of 48,200 documents. This production included, among other categories, DPT trading records, internal communications from the MISO trading desk, and corporate organizational and compliance documents. All documents were produced with Bates numbering in accordance with FERC OE's specifications.
August 7, 2023: FERC OE served a second data request, consisting of 18 supplemental interrogatories requesting additional detail regarding specific trading strategies, FTR acquisition decisions, gas nomination practices, and trader compensation.
August 21, 2023: Respondents made their second document production, consisting of 63,400 documents. This production included supplemental trading records, additional trader communications, FTR auction participation records, gas nomination schedules, and power purchase agreement excerpts.
September 5, 2023: Kyle Renfro, Senior Trader on DPT's MISO Day-Ahead Desk, provided testimony under oath pursuant to 18 C.F.R. § 1b.12. The testimony was conducted at FERC's offices in Washington, D.C. Mr. Renfro answered all questions posed by FERC Staff and was represented by counsel from C&H.
September 12, 2023: Anastasia Petrov, Trader on DPT's MISO Real-Time Desk, provided testimony under oath pursuant to 18 C.F.R. § 1b.12. The testimony was conducted at FERC's offices in Washington, D.C. Ms. Petrov answered all questions posed by FERC Staff and was represented by counsel from C&H.
September 19, 2023: Derek Sung, Senior Vice President of Power Marketing & Trading, provided testimony under oath pursuant to 18 C.F.R. § 1b.12. The testimony was conducted at FERC's offices in Washington, D.C. Mr. Sung answered all questions posed by FERC Staff and was represented by counsel from C&H.
In addition to the testimony of Mr. Renfro, Ms. Petrov, and Mr. Sung, Respondents made three additional trading desk and operations personnel available for testimony under 18 C.F.R. § 1b.12, bringing the total number of Dunmore employees who provided sworn testimony to six. All employees cooperated fully and provided candid responses to FERC Staff's questions.
October 2, 2023: FERC Staff issued the Preliminary Findings letter that is the subject of this Response. The Preliminary Findings set forth Staff's allegations of market manipulation, its estimated unjust profits of $12.8 million, and its demand for a total monetary sanction of $30.8 million ($18 million civil penalty plus $12.8 million disgorgement).
October 10, 2023: A meeting was held between C&H and Dunmore representatives and FERC Enforcement leadership, including Margaret Hollowell (Director, Division of Investigations), Thomas Adebayo (Deputy Director, Division of Investigations), and Christine Pham (Senior Attorney, Division of Investigations). At this meeting, Respondents' counsel provided a preliminary overview of the arguments and evidence that would be presented in this formal Response and expressed Respondents' interest in engaging in settlement discussions following submission of this Response.
October 30, 2023: Respondents made their third and final document production to FERC OE, consisting of 75,400 documents. This production brought the cumulative total of documents produced to approximately 187,000 documents, encompassing approximately 1.24 million pages from 11 custodians. The documents covered the period from January 1, 2021, through May 22, 2023, extending beyond the boundaries of the Relevant Period to provide FERC Staff with broader contextual information regarding DPT's trading operations. E-discovery collection, processing, review, and production for this investigation were managed by Crestline Document Solutions LLC, located at 1400 Smith Street, Suite 2100, Houston, Texas 77002.
Throughout this investigation, Respondents have endeavored to cooperate fully and promptly with FERC Staff's requests for information, documents, and testimony. At no point have Respondents sought to obstruct, delay, or impede the investigation. Respondents' cooperation is discussed in further detail in Section VI.A below.
D. Summary of FERC Staff's Allegations
FERC Staff's Preliminary Findings allege that DPT engaged in a multi-pronged scheme to manipulate MISO's Day-Ahead and Real-Time energy markets during the Relevant Period. Staff's theory of the case consists of three interrelated prongs, each of which Respondents address in detail in Section IV below. The following summary is provided for context.
Prong 1: Uneconomic Day-Ahead Bidding. FERC Staff alleges that Kyle Renfro, Senior Trader on DPT's MISO Day-Ahead Desk, submitted Day-Ahead offers for DPT's gas-fired generation units at Indiana Hub at prices significantly below the units' marginal cost of production. According to Staff, these offers ranged from -$15/MWh to -$40/MWh and were designed not to achieve profitable generation, but rather to create artificial congestion patterns on the transmission system at and around Indiana Hub. Staff alleges that DPT held FTR positions — with a notional value of approximately $47.3 million — on congestion paths that would benefit from increased congestion at Indiana Hub, and that the uneconomic Day-Ahead offers were intended to generate profits on those FTR positions. Staff characterizes the Day-Ahead offers as a "loss leader" component of a broader cross-product manipulative strategy.
Prong 2: Cross-Product Manipulation (Virtual Transactions at Minnesota Hub). FERC Staff alleges that Anastasia Petrov, Trader on DPT's MISO Real-Time Desk, executed Real-Time virtual transactions — specifically, Increment Offers and Decrement Bids — at the Minnesota Hub pricing node that were designed to amplify the congestion differential between Indiana Hub and Minnesota Hub created by the Day-Ahead uneconomic offers described in Prong 1. Staff's theory posits that the virtual positions at Minnesota Hub were coordinated with the Day-Ahead physical offers at Indiana Hub to maximize the congestion revenue flowing to DPT's FTR positions on the Indiana Hub–Minnesota Hub congestion path.
Prong 3: Physical-Financial Coordination (Gas Nominations). FERC Staff alleges that DPT coordinated the timing and volume of gas nominations through Dunmore Midstream Partners LP ("DMP") to support the uneconomic generation offers described in Prong 1 and to mask the true marginal cost of DPT's gas-fired generation units. According to Staff, by coordinating gas scheduling through an affiliated midstream entity, DPT was able to create the appearance that its gas-fired units had lower marginal costs than they actually did, thereby making the negative offers appear more consistent with legitimate economic behavior than they would have if the true costs had been transparent.
FERC Staff estimates the volume of allegedly manipulative transactions as follows:
• Day-Ahead uneconomic generation offers: approximately 2,840 GWh during the Relevant Period
• FTR positions allegedly benefiting from the manipulation: aggregate notional value of $47.3 million
• Virtual transactions at Minnesota Hub: approximately 1,620 GWh during the Relevant Period
FERC Staff's economic analysis, prepared by Dr. Samuel Breck, Senior Economist in OE's Division of Analytics and Surveillance, estimates that DPT earned unjust profits of approximately $12.8 million from the alleged manipulative scheme during the Relevant Period. Based on this analysis, FERC Staff has demanded the following monetary sanctions:
As set forth in detail in this Response, Respondents submit that each of the three prongs of FERC Staff's alleged manipulation theory is unsupported by the evidence, and that Staff's economic analysis significantly overstates the market impact of DPT's trading activity. The total demand of $30.8 million bears no reasonable relationship to the actual facts of this case.
III. LEGAL FRAMEWORK
A. Elements of Market Manipulation Under the Federal Power Act and Commission Regulations
Section 222 of the Federal Power Act ("FPA"), 16 U.S.C. § 824v, prohibits "any entity" from using or employing "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. Congress enacted Section 222 as part of the Energy Policy Act of 2005, Pub. L. No. 109-58, § 1283, 119 Stat. 594, 979 (2005), modeled on Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the Securities and Exchange Commission's Rule 10b-5, 17 C.F.R. § 240.10b-5. In enacting Section 222, Congress intended to provide the Commission with authority analogous to that exercised by the SEC in the securities context to detect, deter, and remedy fraudulent and manipulative conduct in wholesale energy markets.
The Commission implemented Section 222 through its anti-manipulation regulation, 18 C.F.R. § 1c.2, which provides in relevant part:
(a) It shall be unlawful for any entity, directly or indirectly, in connection with the purchase or sale of electric energy or the purchase or sale of transmission services subject to the jurisdiction of the Commission,
(1) To use or employ any device, scheme, or artifice to defraud,
(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity.
To establish a violation of Section 222 and 18 C.F.R. § 1c.2, FERC Staff must prove three essential elements: (1) that the respondent engaged in fraudulent or deceptive conduct; (2) that such conduct was "in connection with" a jurisdictional transaction — i.e., the purchase or sale of electric energy or transmission services subject to the Commission's jurisdiction; and (3) that the respondent acted with scienter — that is, with the specific intent to deceive, manipulate, or defraud. See Prohibition of Energy Market Manipulation, Order No. 670, 114 FERC ¶ 61,047 (2006), reh'g denied, 114 FERC ¶ 61,300 (2006).
Each of these elements warrants careful examination in the context of this proceeding.
Fraudulent or deceptive conduct. The Commission has recognized that the scope of "fraud" under the anti-manipulation rule is broad, encompassing not only affirmative misrepresentations but also schemes, artifices, and courses of business that operate as a fraud or deceit. However, the Commission has also recognized that not all trading activity that affects market prices constitutes fraud. The mere fact that a market participant's offers or transactions influence market clearing prices does not establish fraudulent conduct; such influence is an inherent and expected feature of competitive markets. To constitute fraud, the conduct must involve an element of deception or artifice — something beyond ordinary market participation that renders the transactions fundamentally different from what they purport to be.
The Commission has addressed this distinction in numerous enforcement proceedings. In Order No. 670, the Commission stated that "whether a transaction is fraudulent will depend on the facts and circumstances." 114 FERC ¶ 61,047 at P 49. The Commission further emphasized that a "transaction that is legitimate on its face can nonetheless be fraudulent if the intent is to manipulate." Id. at P 50. Conversely, a transaction that appears anomalous or unusual is not necessarily fraudulent if it is motivated by a legitimate economic purpose and is not accompanied by deceptive intent. See Camberwell Bancorp, 144 FERC ¶ 61,041 at P 70 (2013) (recognizing the distinction between manipulative and legitimate trading).
Nexus with jurisdictional transactions. The "in connection with" element requires that the alleged fraudulent conduct bear a sufficient nexus to a jurisdictional transaction. In the context of organized wholesale electricity markets such as MISO, transactions for the purchase or sale of electric energy at wholesale, including Day-Ahead offers, Real-Time transactions, virtual transactions, and FTR settlements, are jurisdictional. There is no dispute in this proceeding that DPT's MISO market transactions are subject to the Commission's jurisdiction. Respondents do not contest this element.
Scienter. The scienter requirement is the element of greatest significance in this proceeding. In Order No. 670, the Commission expressly adopted a scienter standard for its anti-manipulation rule, requiring "intentional or reckless" conduct. 114 FERC ¶ 61,047 at P 52. The Commission stated that "negligence is not sufficient" to establish a violation. Id. More importantly, in the enforcement context, the Commission has repeatedly emphasized that scienter must be established by evidence of the respondent's actual state of mind — that is, evidence that the respondent intended to deceive, manipulate, or defraud. See, e.g., Maxim Power Corp., 151 FERC ¶ 61,094 at P 83 (2015); Coaltrain Energy, L.P., 155 FERC ¶ 61,204 at P 166 (2016).
FERC Staff cannot satisfy the scienter requirement by relying solely on inferences drawn from trading patterns. While trading patterns may constitute circumstantial evidence from which intent may be inferred, such inferences are insufficient when the trading activity is susceptible to a plausible, legitimate economic explanation. See ETRACOM LLC, 155 FERC ¶ 61,284 at PP 112-15 (2016). As the Commission has recognized, where a respondent offers a credible legitimate business purpose for its trading activity, and the record does not contain direct evidence contradicting that explanation, FERC Staff has not met its burden of establishing scienter.
The legitimate business purpose defense. The Commission has consistently recognized that trading activity that serves a legitimate economic purpose cannot be deemed manipulative merely because it incidentally affects market prices or produces profits for the trader. See Order No. 670, 114 FERC ¶ 61,047 at P 50 ("A legitimate business purpose can be evidence that conduct is not fraudulent."); Camberwell Bancorp, 144 FERC ¶ 61,041 at P 71 (recognizing that a legitimate business purpose "undercuts an inference of manipulative intent"). This principle is of paramount importance in organized wholesale electricity markets, where market participants routinely engage in complex portfolio management strategies involving multiple products, pricing nodes, and time horizons. The fact that a particular offer or transaction, viewed in isolation, may appear to be uneconomic does not establish manipulation where the transaction serves a legitimate purpose within the context of the participant's broader portfolio.
In the present case, as discussed in detail in Section IV below, DPT's Day-Ahead offers at Indiana Hub served the legitimate business purpose of optimizing DPT's diversified generation portfolio, meeting contractual minimum generation commitments, and managing opportunity costs associated with gas supply obligations. These legitimate business purposes are supported by contemporaneous documentation, sworn testimony, and independent economic analysis.
B. The Commission's Penalty Guidelines
The Commission's Revised Policy Statement on Penalty Guidelines, 132 FERC ¶ 61,216 (2010), sets forth the framework the Commission applies in determining appropriate civil penalties for violations of the FPA and Commission regulations. The Penalty Guidelines establish a structured methodology for calculating penalties that accounts for the nature and seriousness of the violation, the circumstances of the case, and the culpability and conduct of the respondent.
Under the Penalty Guidelines, the base penalty is calculated as a function of the seriousness level of the violation and the applicable offense level. The seriousness level is determined with reference to the "pecuniary gain" resulting from the violation or the "pecuniary loss" to victims. The offense level may be adjusted upward or downward based on various specific offense characteristics, including the volume of commerce involved, the degree of planning and sophistication, and the role of the violator.
The Penalty Guidelines also identify a range of aggravating and mitigating factors that the Commission considers in determining the final penalty amount within (or outside of) the calculated guideline range. Aggravating factors that may warrant an upward adjustment include prior violations, failure to cooperate with the investigation, obstruction of justice, and violation of a prior Commission order. Mitigating factors that may warrant a downward adjustment include:
• Full and timely cooperation with the investigation, including the voluntary production of documents and the provision of testimony;
• The existence and effectiveness of a pre-existing compliance program;
• Prompt remedial measures to prevent future violations;
• The absence of prior violations;
• Self-reporting of the violation; and
• The organization's size, financial condition, and ability to pay.
In this proceeding, FERC Staff calculated a base penalty of $9 million and applied a 2× multiplier for "duration and scope," doubling the penalty to $18 million. FERC Staff's application of this multiplier is contested by Respondents on multiple grounds. First, the base penalty of $9 million is itself overstated because it is derived from Dr. Breck's inflated estimate of $12.8 million in unjust profits rather than the actual market impact of no more than $2.1 million, as demonstrated by Dr. Whitfield's independent analysis. Second, the 2× multiplier for duration and scope is unwarranted given the characteristics of the conduct at issue: the Relevant Period of approximately 14.5 months does not represent an unusually long duration for a trading pattern, and the "scope" of the alleged scheme — limited to two pricing nodes within a single organized wholesale market — does not justify enhancement beyond the base penalty. The Penalty Guidelines contemplate enhanced multipliers for violations of exceptional duration, breadth, or systemic impact; the allegations here do not rise to that level.
In addition to the civil penalty, FERC Staff demands disgorgement of $12.8 million in alleged unjust profits. Under the Commission's precedent, disgorgement is a remedial measure, not a punitive one, and must be based on a reliable calculation of the actual unjust profits that are causally linked to the specific violative conduct. See, e.g., Total Gas & Power North America, Inc., 155 FERC ¶ 61,105 at P 292 (2016). Disgorgement that is speculative or that attributes profits to the respondent that are not causally connected to the alleged violation is impermissible. As discussed in Section V.B below, FERC Staff's $12.8 million disgorgement demand fails to meet this standard.
C. Burden of Proof
FERC Staff bears the burden of proving each element of the alleged violation by a preponderance of the evidence. See 18 C.F.R. § 385.209(a); Camberwell Bancorp, 144 FERC ¶ 61,041 at P 54. This burden encompasses both the objective elements of the alleged violation (fraudulent or deceptive conduct, nexus with jurisdictional transactions) and the subjective element (scienter). Staff must affirmatively demonstrate, by competent evidence, that the respondent engaged in conduct that was fraudulent or deceptive in nature and that the respondent did so with the intent to deceive, manipulate, or defraud.
The burden of proof has particular significance in cases, like this one, where FERC Staff's theory of manipulation rests primarily on inferences drawn from trading patterns rather than on direct evidence of manipulative intent. While circumstantial evidence, including trading patterns, can support an inference of manipulation, the Commission has recognized that such inferences are weakened — and may be negated entirely — when the respondent offers a legitimate economic explanation for the trading activity that is supported by the record. See Coaltrain Energy, L.P., 155 FERC ¶ 61,204 at P 166 (recognizing that legitimate business justification can rebut inference of manipulative intent).
In the present case, Respondents have provided — through sworn testimony, contemporaneous documentary evidence, and independent expert economic analysis — a comprehensive and credible legitimate business explanation for DPT's trading activity during the Relevant Period. FERC Staff's Preliminary Findings do not identify any direct evidence of manipulative intent; they do not cite any "smoking gun" documents, communications reflecting a plan to manipulate, or other direct evidence of scienter. In the absence of such evidence, and in the face of Respondents' legitimate business justification, Staff has not met its burden of proof.
IV. ARGUMENT
A. DPT's Day-Ahead Offers Reflected Legitimate Portfolio Optimization, Not Manipulation
1. The Portfolio Optimization Strategy Explained
The centerpiece of FERC Staff's Preliminary Findings is the allegation that DPT submitted Day-Ahead generation offers at Indiana Hub at prices significantly below the marginal cost of production — ranging from -$15/MWh to -$40/MWh — with the purpose of creating artificial congestion patterns to benefit DPT's FTR positions. This allegation fundamentally mischaracterizes the nature and purpose of DPT's Day-Ahead bidding strategy.
DPT operated a diversified generation portfolio within MISO during the Relevant Period, consisting of natural gas-fired generation units at or near Indiana Hub, wind generation facilities, and solar generation facilities distributed across the MISO footprint. The management of such a diversified portfolio is inherently complex. Each generation resource has different cost characteristics, dispatch constraints, contractual obligations, and interactions with the broader market. A competent portfolio manager does not optimize each unit in isolation; rather, the portfolio manager considers the full range of inter-unit dependencies, congestion exposure, load-following obligations, fuel supply logistics, and market conditions in developing an integrated bidding and dispatch strategy across the entire portfolio.
This is precisely the approach that DPT's MISO trading desk employed during the Relevant Period. DPT's Day-Ahead bidding reflected a holistic portfolio optimization strategy designed to maximize risk-adjusted returns across the entire portfolio, accounting for the interactions among DPT's generation assets, its load-serving and contractual obligations, its fuel supply commitments, and its congestion hedging positions. This approach is well-recognized in the energy industry and is consistent with the practices of other sophisticated portfolio participants in MISO and other organized wholesale markets.
The sworn testimony of Derek Sung, Senior Vice President of Power Marketing & Trading, provided on September 19, 2023, confirmed the existence and nature of DPT's portfolio optimization strategy. Mr. Sung testified that the MISO trading desk was authorized by Dunmore's senior management to optimize offers across the portfolio, taking into account inter-unit dependencies, congestion hedging, and load-following obligations. Mr. Sung further testified that the portfolio optimization approach was developed over time based on the trading desk's experience and analysis of market conditions, and that it was documented in internal strategy memoranda and discussed at regular trading desk meetings. Mr. Sung's testimony is fully corroborated by the documentary evidence produced in this investigation.
Kyle Renfro, Senior Trader on DPT's MISO Day-Ahead Desk, provided testimony on September 5, 2023, in which he confirmed that Day-Ahead offers at Indiana Hub were submitted as part of the broader portfolio strategy described by Mr. Sung, and not as standalone offers intended to create artificial congestion or to produce losses on individual units for the purpose of benefiting FTR positions. Mr. Renfro testified that his offer pricing decisions took into account the full range of costs and revenues associated with the portfolio, including fuel costs, start-up and commitment costs, contractual obligations, opportunity costs, and the expected interaction between generation dispatch and congestion hedging. Mr. Renfro's testimony is consistent, credible, and supported by contemporaneous documentation.
DPT's portfolio optimization approach was not idiosyncratic or unusual. To the contrary, it is consistent with widely accepted industry practice for portfolio participants in organized wholesale markets. Large portfolio participants routinely optimize across multiple generation assets, load positions, congestion hedges, and financial instruments to maximize the overall value of their portfolios. The Commission and organized wholesale market operators have long recognized that such portfolio-level optimization may produce individual unit offers that, viewed in isolation, appear below the short-run marginal cost of that specific unit, but that are economically rational when considered in the context of the broader portfolio. FERC Staff's approach of isolating individual unit offers from their portfolio context and characterizing them as "uneconomic" is analytically unsound and inconsistent with the reality of how sophisticated market participants operate.
2. Economic Rationale for Offer Prices
The economic rationale for DPT's Day-Ahead offer prices at Indiana Hub is grounded in the fundamental principles of portfolio optimization. When a market participant operates a diversified portfolio of generation assets with varying cost structures, dispatch constraints, and contractual obligations, the optimal bidding strategy for any individual unit depends not only on that unit's own marginal cost, but also on the expected impact of that unit's dispatch on the value of the rest of the portfolio. This includes the impact on congestion hedging positions (such as FTRs), the impact on the ability to meet load-serving and contractual obligations, and the impact on fuel supply logistics and associated costs.
In this context, an offer price for a given unit that is below the unit's standalone short-run marginal cost may be economically rational — indeed, may be the profit-maximizing strategy — if the dispatch of that unit at the lower price produces benefits elsewhere in the portfolio that exceed the apparent loss on the unit itself. This is the essence of portfolio optimization, and it is precisely what DPT's trading desk was doing during the Relevant Period.
DPT's total portfolio returns during the Relevant Period were positive and consistent with competitive outcomes. The portfolio generated returns that were within the range of returns achieved by comparable MISO portfolio participants, as confirmed by Dr. Whitfield's analysis (discussed in Section IV.D below). This fact is significant: if DPT's bidding strategy had been a manipulative scheme designed to generate unjust profits, one would expect to see abnormal or supracompetitive returns at the portfolio level. Instead, DPT's returns were unremarkable.
The contemporaneous documentation of DPT's portfolio optimization rationale is significant. Internal DPT strategy documents produced in the third document production, identified at Bates range DUN-00142876 through DUN-00143091, demonstrate that the portfolio optimization approach was documented and discussed internally before and during the Relevant Period. These documents include trading desk strategy memoranda, portfolio optimization analyses, and meeting notes reflecting discussions among Mr. Renfro, Mr. Sung, and other members of the MISO trading desk regarding the rationale for offer pricing decisions. The documents are consistent with the testimony of Mr. Sung and Mr. Renfro and corroborate the legitimate business purpose of DPT's Day-Ahead offers.
3. No Evidence of Fraudulent Intent
Perhaps the most significant fact in this proceeding is the absence of any evidence — direct or circumstantial — of fraudulent intent on the part of DPT, its traders, or Dunmore's management. FERC Staff's Preliminary Findings do not identify a single document, communication, or statement reflecting a plan, scheme, or intent to manipulate MISO markets. This is not for want of a thorough search: Respondents have produced approximately 187,000 documents, encompassing roughly 1.24 million pages, from 11 custodians. These documents include emails, instant messages, trading records, strategy memoranda, meeting notes, and other materials spanning the period from January 1, 2021, through May 22, 2023. Despite this voluminous production, FERC Staff has not identified a single "smoking gun" document — no email in which a trader discusses manipulating congestion, no instant message in which a trader refers to creating artificial price impacts, no strategy memorandum in which portfolio optimization is used as a pretext for a manipulative scheme.
The absence of direct evidence of scienter is highly probative. In the Commission's prior enforcement actions involving market manipulation, the existence of incriminating communications has been a hallmark of the evidentiary record. See, e.g., Camberwell Bancorp, 144 FERC ¶ 61,041 (2013) (citing extensive trader communications reflecting manipulative intent); Halcyon Securities Energy Trading, LLC, 140 FERC ¶ 61,178 (2012) (relying on trader communications to establish scienter). The absence of any comparable evidence in this case is telling and weighs heavily against a finding of manipulation.
Trader communications reviewed in their totality — across the full population of documents produced — are consistent with legitimate business discussions about market conditions, portfolio positioning, risk management, fuel costs, weather forecasts, load projections, and other routine topics that competent energy traders discuss in the normal course of their work. The communications between Mr. Renfro and Ms. Petrov, between traders and Mr. Sung, and among other members of the MISO trading desk reflect the ordinary give-and-take of a professional trading operation, not the hallmarks of a manipulative scheme.
FERC Staff's Preliminary Findings rely on inferring manipulative intent from trading patterns alone — specifically, from the combination of negative Day-Ahead offers at Indiana Hub and the contemporaneous holding of FTR positions on congestion paths involving that node. But as discussed above, trading patterns that are consistent with legitimate portfolio optimization cannot sustain an inference of manipulation absent additional evidence of fraudulent intent. The Commission has recognized that "where a respondent has offered a legitimate economic explanation for its conduct, the trading pattern alone is not sufficient to establish scienter." See ETRACOM LLC, 155 FERC ¶ 61,284 at P 113. Here, DPT has offered a comprehensive, credible, and well-documented legitimate economic explanation for its Day-Ahead offers. FERC Staff has not rebutted that explanation with direct evidence of scienter. The inference of manipulation that Staff seeks to draw from trading patterns alone is insufficient to meet Staff's burden of proof.
B. Negative Day-Ahead Offers Reflected Opportunity Costs and Contractual Minimum Generation Commitments
1. Contractual Minimum Generation Obligations
FERC Staff's theory that DPT's negative Day-Ahead offers at Indiana Hub were "uneconomic" and therefore indicative of manipulation rests on a fundamental misunderstanding of the cost structure and contractual obligations applicable to DPT's gas-fired generation units. The Preliminary Findings treat negative offers as inherently suspect, apparently on the assumption that a rational market participant would never offer to sell power at a negative price unless it was pursuing some ulterior manipulative objective. This assumption is incorrect as a matter of economics, market practice, and Commission precedent.
DPT's gas-fired generation units at Indiana Hub were subject to contractual minimum generation commitments under two categories of agreements during the Relevant Period. First, DPT was party to long-term power purchase agreements ("PPAs") with counterparties that required DPT to deliver specified minimum quantities of energy during specified periods. These PPAs, excerpts of which are included in the Exhibit Book as Exhibit D, imposed contractual obligations on DPT to maintain minimum generation levels regardless of prevailing market prices. Failure to meet these minimum generation commitments would have exposed DPT to contractual damages, replacement power costs, and reputational harm. These commitments were entered into in the ordinary course of DPT's business and reflect arms'-length commercial arrangements with creditworthy counterparties.
Second, certain of DPT's gas-fired units at Indiana Hub were subject to reliability must-run ("RMR") obligations imposed by MISO. Under these obligations, DPT was required to make the units available for dispatch and to maintain minimum generation levels as necessary to support the reliability of the transmission system in the Indiana Hub area. RMR obligations are imposed by the RTO for system reliability purposes and are not discretionary on the part of the generation owner. Compliance with RMR obligations is mandatory, and failure to comply can result in penalties imposed by the RTO.
When prevailing Day-Ahead market prices at Indiana Hub were low — as they were during numerous intervals in the Relevant Period due to a combination of low natural gas prices, high wind generation output, mild weather, and transmission outage events — the economics of generating at positive offer prices were unfavorable for DPT's gas-fired units. However, DPT could not simply withdraw these units from the market, because doing so would have breached its contractual minimum generation commitments and RMR obligations. In this context, DPT's negative offers — ranging from -$15/MWh to -$40/MWh — reflected the cost of meeting these contractual and regulatory obligations. Specifically, the negative offer prices represented the price at which DPT was willing to incur a loss on generation in order to avoid the greater cost of breaching its contractual commitments and RMR obligations.
This type of economic decision-making is well-understood in the energy industry and is a common feature of wholesale electricity markets. Generation owners with contractual commitments and must-run obligations routinely submit negative offers to ensur