1016-00004 · Dunmore Energy Holdings · Settlement Negotiations

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MEMORANDUM

November 28, 2023

FROM: Catherine Bloom, Responsible Partner, Calderwood & Harkness LLP

TO: Alan Ngo, Billing Partner; Hannah Brinkley, Lead Associate; Patrick Gallagher, Working Associate

RE: Settlement Strategy and Negotiation Framework — Dunmore Energy Holdings Ltd. & Dunmore Power Trading LLC — FERC Docket No. IN23-7-000

C&H Matter Number: 1016-00004

C&H Billing Code: 71420.00001

I. PURPOSE AND SCOPE OF MEMORANDUM

This memorandum sets forth the settlement strategy and negotiation framework for resolving the Federal Energy Regulatory Commission ("FERC" or "Commission") Office of Enforcement ("OE") investigation, docketed as FERC Docket No. IN23-7-000, of Dunmore Energy Holdings Ltd. ("DEH") and its wholly owned subsidiary, Dunmore Power Trading LLC ("DPT," and together with DEH, "Dunmore"). This memorandum is intended to guide the Calderwood & Harkness LLP ("C&H") engagement team in preparation for the first settlement conference with FERC Enforcement Staff ("FERC Staff" or "Staff"), which is anticipated to take place in early December 2023 and is currently scheduled for December 4, 2023.

By way of context and procedural background, FERC's Division of Investigations issued a preliminary inquiry letter to Dunmore on May 22, 2023. The investigation has proceeded on a non-public basis pursuant to 18 C.F.R. § 1b.9. C&H was engaged pursuant to an engagement letter dated May 24, 2023, and has since been actively managing Dunmore's response to the investigation. Over the course of the investigation, C&H has coordinated the production of approximately 187,000 documents (comprising approximately 1.24 million pages) from eleven custodians, prepared six Dunmore employees for and accompanied them to investigative testimony sessions, and engaged in substantive dialogue with FERC Staff regarding the scope and theories underlying the investigation.

On October 10, 2023, a meeting with FERC Enforcement leadership took place at which Staff communicated FERC's preliminary position on the matter, including the potential for settlement discussions. On November 6, 2023, C&H submitted Dunmore's formal Response to FERC Staff's Preliminary Findings letter, setting forth Dunmore's defenses and challenging both the factual basis and the legal sufficiency of Staff's allegations. On November 20, 2023, Dr. Leonard Whitfield of Whitfield Economic Advisors LLC submitted his independent expert report rebutting the market impact analysis performed by FERC Staff's economist.

FERC Staff's initial demand, as communicated in the Preliminary Findings letter and reiterated in subsequent discussions, totals $30.8 million, consisting of $18 million in civil penalties and $12.8 million in disgorgement of alleged unjust profits. Dunmore's settlement objective, as confirmed by General Counsel Martin Llewellyn and consistent with the preferences expressed by Chairman and CEO Gavin Harcourt, is to achieve a resolution at the lowest defensible amount while avoiding formal litigation before a FERC Administrative Law Judge ("ALJ"). This memorandum provides the analytical framework for accomplishing that objective.

The sections that follow analyze FERC Staff's position and the strengths and weaknesses thereof, assess Dunmore's available defenses, benchmark the matter against comparable FERC enforcement settlements, establish a target settlement range and walk-away threshold, evaluate the litigation alternative, outline the negotiation strategy and specific tactics to be employed at the first settlement conference, discuss the role of the compliance plan in the settlement framework, present a financial impact analysis for the client, and set forth a proposed timeline and the authorizations required to proceed.

II. SUMMARY OF FERC STAFF'S POSITION AND INITIAL DEMAND

A. The Alleged Conduct

FERC Staff's Preliminary Findings letter, dated September 29, 2023, alleges that Dunmore engaged in a multi-faceted scheme of market manipulation in the Midcontinent Independent System Operator ("MISO") organized wholesale electricity market during a period spanning approximately 14.5 months, from January 3, 2022, through March 17, 2023 (the "Relevant Period"). Staff's theory of manipulation rests on three interrelated categories of allegedly improper conduct:

Uneconomic Day-Ahead Bidding. First, Staff alleges that DPT's Senior Trader Kyle Renfro submitted persistent uneconomic Day-Ahead generation offers at the Indiana Hub, pricing DPT's gas-fired generation assets at levels as low as negative $15/MWh to negative $40/MWh — prices that Staff contends were significantly below the marginal cost of production for the relevant generating units. Staff contends that these offers lacked any legitimate economic rationale and were instead designed to create or exacerbate congestion patterns at the Indiana Hub that would benefit DPT's Financial Transmission Rights ("FTR") portfolio and related virtual trading positions.

Cross-Product Manipulation. Second, Staff alleges that DPT's trader Anastasia Petrov submitted Real-Time virtual positions — specifically, Increment Offers ("INCs") and Decrement Bids ("DECs") — at the Minnesota Hub that were designed to amplify the congestion differentials created by the uneconomic Day-Ahead offers submitted by Renfro at the Indiana Hub. According to Staff, the virtual positions at the Minnesota Hub were not entered for their own independent economic merit but rather as a complementary component of a coordinated cross-product strategy intended to maximize the value of DPT's FTR positions along the Indiana Hub-Minnesota Hub path.

Physical-Financial Coordination. Third, Staff alleges that DPT coordinated gas nominations through Dunmore Midstream Partners LP ("DMP"), a DEH affiliate, to support the uneconomic generation offers and mask the true marginal cost of the gas-fired generating units. Staff contends that DMP's gas nominations were structured to create the appearance that DPT's generation offers were economically justified by low-cost gas supply, when in fact the gas was being supplied at below-market rates through intra-company arrangements that did not reflect arm's-length pricing.

During the Relevant Period, Staff has identified approximately 2,840 GWh of allegedly uneconomic Day-Ahead generation offers at the Indiana Hub, FTR positions with a total notional value of approximately $47.3 million, and approximately 1,620 GWh of virtual transactions at the Minnesota Hub. The volume and duration of the alleged conduct are central to Staff's contention that this was a sustained manipulative scheme rather than an isolated trading decision.

B. FERC Staff's Penalty Calculation

FERC Staff's initial demand of $30.8 million is composed of the following elements:

Civil Penalty. Staff has calculated a base penalty of $9 million, derived from the FERC Penalty Guidelines and the factors set forth therein for evaluating the seriousness of market manipulation violations. Staff has then applied a 2× multiplier to the base penalty, citing both the duration of the alleged scheme (14.5 months) and the scope of the alleged conduct (encompassing Day-Ahead physical offers, Real-Time virtual positions, and coordinated gas nominations across multiple market products and geographic locations within MISO). This yields a total civil penalty demand of $18 million.

Disgorgement. In addition to the civil penalty, Staff seeks disgorgement of $12.8 million, representing Staff's estimate of the unjust profits that Dunmore obtained as a result of the alleged manipulative conduct. Staff's disgorgement calculation is based on an analysis by Dr. Samuel Breck, a Senior Economist in FERC's Division of Analytics and Surveillance, which estimates the incremental gains attributable to DPT's FTR positions and virtual trading profits during the Relevant Period, net of the losses incurred on the allegedly uneconomic generation offers.

Total Initial Demand. The total initial demand is therefore $18 million (civil penalty) plus $12.8 million (disgorgement) = $30.8 million.

Staff's penalty calculation is made pursuant to and calculated under the FERC Penalty Guidelines and Section 316A of the Federal Power Act ("FPA"), 16 U.S.C. § 825o-1, which authorizes the Commission to assess civil penalties of up to $1,000,000 per violation per day for violations of Part II of the FPA or any rule or order thereunder. The statutory basis for the underlying violation is Section 222 of the FPA, 16 U.S.C. § 824v, which prohibits the use of any manipulative or deceptive device or contrivance in connection with the purchase or sale of electric energy or the purchase or sale of transmission services subject to FERC jurisdiction, as further implemented by the Commission's Anti-Manipulation Rule, 18 C.F.R. § 1c.2.

C. Strengths of FERC Staff's Position

Any realistic assessment of Dunmore's settlement position requires candid acknowledgment of the strengths of FERC Staff's case. The engagement team should be aware of the following factors, each of which lends some facial support to Staff's theory of manipulation:

First, the pattern of persistent negative-price offers over a period of approximately 14.5 months creates a facially troubling record. While Dunmore has legitimate explanations for these offers (discussed in Section III below), the sustained duration and depth of the negative pricing — offers as low as negative $40/MWh — will be difficult to explain away entirely and will create an unfavorable narrative if the matter proceeds to a public forum.

Second, DPT's contemporaneous FTR positions benefited materially from the congestion patterns observed at the Indiana Hub during the Relevant Period. While correlation does not establish causation, the alignment of economic interests between the allegedly uneconomic offers and the profitable FTR positions provides Staff with a plausible inference of manipulative motive.

Third, there exists a documented temporal correlation between DPT's Day-Ahead bidding activity and congestion outcomes at the Indiana Hub. This correlation was initially identified and flagged by Velthorn Market Analytics, Inc., the MISO Independent Market Monitor ("IMM"), under the direction of Dr. Patricia Engel. The correlation was subsequently analyzed in greater detail by Dr. Samuel Breck of FERC's Division of Analytics and Surveillance. The involvement of both the IMM and FERC's internal economists lends analytical credibility to the statistical foundation of Staff's case.

Fourth, FERC Staff has obtained communications between Renfro and Petrov — principally instant messages and emails exchanged on DPT's internal communication systems — that Staff may seek to characterize as evidence of a coordinated cross-product strategy. While the content of these communications, as we understand them, is largely innocuous when viewed in context, certain isolated exchanges could be subject to adverse characterization in a public proceeding.

Fifth, Senior Vice President Derek Sung's supervisory role over all fourteen traders on the MISO desk, including both Renfro and Petrov, provides Staff with a basis for arguing institutional awareness of, and acquiescence to, the trading patterns at issue. This creates a risk that Staff could characterize the alleged scheme as a desk-wide strategy rather than the independent actions of individual traders.

D. Weaknesses of FERC Staff's Position

Notwithstanding the foregoing, FERC Staff's position contains several significant vulnerabilities that should be leveraged in settlement negotiations:

First, and most significantly, Staff's market impact calculation of $12.8 million in unjust profits relies on assumptions about causation that Dr. Whitfield's independent expert analysis has substantially rebutted. Dr. Whitfield's report, submitted on November 20, 2023, concludes that the actual market impact attributable to DPT's Day-Ahead bidding activity is no more than $2.1 million. The $10.7 million differential between Staff's estimate and Dr. Whitfield's estimate is attributable primarily to Staff's failure to account for confounding variables, most notably the significant transmission outage events that occurred during the Relevant Period and that were the primary drivers of the congestion patterns at the Indiana Hub.

Second, Dr. Whitfield's analysis demonstrates that the congestion patterns at the Indiana Hub that Staff attributes to DPT's bidding were, in fact, primarily driven by transmission outage events on the MISO system, including planned maintenance outages on three major 345kV transmission lines and unplanned outages resulting from extreme weather events in the winter of 2022-2023. When these exogenous factors are properly controlled for, the residual impact of DPT's bidding on congestion outcomes is substantially diminished.

Third, DPT's FTR positions along the Indiana Hub-Minnesota Hub path were acquired in MISO's annual and monthly FTR auctions months before the Relevant Period began, with the majority of positions acquired in MISO's annual FTR auction in November 2021. This acquisition timeline is inconsistent with a manipulative scheme that purportedly commenced in January 2022 and undercuts Staff's inference that the FTR positions were acquired as part of a coordinated plan to profit from manufactured congestion. The FTR acquisition records, which have been produced to Staff as part of the 187,000-document production, support the conclusion that the FTR positions were acquired as a routine hedging mechanism for DPT's generation portfolio.

Fourth, negative Day-Ahead generation offers are not per se manipulative under established FERC precedent. The Commission has recognized that below-cost offers can be economically rational in certain circumstances, including when portfolio optimization considerations, contractual minimum generation commitments, and opportunity costs are taken into account. Dunmore's defenses on this point are discussed in greater detail in Section III.A below.

Fifth, FERC Staff has not demonstrated the element of scienter with the specificity required under the Commission's Anti-Manipulation Rule and governing case law. The Preliminary Findings letter relies heavily on inferences drawn from trading patterns and statistical correlations rather than direct evidence of manipulative intent. While circumstantial evidence can satisfy the scienter element, Staff's case on intent is inferential rather than documentary, and the internal communications obtained by Staff do not, in our assessment, contain the "smoking gun" evidence that would establish a conscious and deliberate intent to manipulate market outcomes.

III. ASSESSMENT OF DUNMORE'S DEFENSES

A. Portfolio Optimization Defense

Dunmore's principal defense to the allegation of uneconomic Day-Ahead bidding is that DPT's negative-price offers at the Indiana Hub reflected a legitimate portfolio optimization strategy that was economically rational when viewed in the context of DPT's full generation and trading portfolio.

Specifically, DPT's Day-Ahead offers took into account several factors beyond the simple marginal cost of production at individual generating units. These factors included opportunity costs associated with committing generating units in the Day-Ahead market versus reserving capacity for the Real-Time market, contractual minimum generation commitments under long-term power purchase agreements and tolling agreements that required DPT to maintain certain generating units at minimum output levels, and the integrated value of generation across DPT's full portfolio of generating assets in the MISO and Southwest Power Pool ("SPP") footprints. When these portfolio-level considerations are taken into account, offers that appear uneconomic on a unit-specific basis may in fact represent economically rational decisions designed to maximize the overall value of the portfolio.

This defense is supported by industry practice and FERC precedent. The Commission and its ALJs have recognized in several proceedings that below-cost offers can be economically justified when a market participant can demonstrate a legitimate business purpose that extends beyond the individual transaction at issue. Portfolio optimization is a widely recognized and accepted practice in organized wholesale electricity markets, and many sophisticated market participants employ similar methodologies to optimize the dispatch and commitment of their generation portfolios.

Derek Sung, who served as Senior Vice President with supervisory responsibility over the MISO desk, provided testimony on September 19, 2023, in which he described the bidding methodology employed by DPT as standard practice for the trading desk. Sung testified that the pricing algorithms used to generate Day-Ahead offers incorporated portfolio-level inputs and were designed to maximize the net value of DPT's generation across multiple market products and locations. His testimony, if credited, provides a contemporaneous business justification for the bidding patterns at issue.

However, the engagement team should be aware of certain limitations of this defense. First, while portfolio optimization is a recognized practice, FERC Staff may argue that the magnitude and persistence of the negative pricing — offers as deep as negative $40/MWh sustained over 14.5 months — exceed what can be explained by legitimate portfolio considerations. Second, the defense is somewhat undermined by the absence of contemporaneous documentation explicitly memorializing the portfolio optimization rationale for specific offers. Sung's testimony provides some support, but the defense would be stronger if there were written policies or internal analyses showing that the negative offers were the output of a documented portfolio optimization process.

B. FTR Hedging Defense

DPT maintains that its FTR positions along the Indiana Hub-Minnesota Hub path served a routine hedging function for DPT's generation portfolio and were not acquired as part of any manipulative scheme. This defense rests on the following factual predicates:

DPT's FTR positions were acquired in MISO's annual and monthly FTR auctions well in advance of the Relevant Period. The majority of the positions were acquired in MISO's annual FTR auction conducted in November 2021, approximately six weeks before the Relevant Period commenced on January 3, 2022. Additional positions were acquired in MISO's monthly FTR auctions during the first quarter of 2022, consistent with DPT's ongoing portfolio hedging activities. The acquisition timing and the purpose of the FTR positions are documented in FTR acquisition records, internal trade tickets, and portfolio management system records, all of which have been produced to FERC Staff as part of the 187,000-document production.

The FTR positions were acquired to hedge the basis risk inherent in DPT's generation portfolio. As an owner and operator of gas-fired generating assets located at or near the Indiana Hub, DPT was exposed to basis risk arising from the difference between locational marginal prices at the Indiana Hub and other MISO pricing nodes. The FTR positions provided a financial hedge against adverse congestion outcomes that could reduce the value of DPT's generation output. This is a standard and widely accepted use of FTRs in organized wholesale electricity markets, and the acquisition of FTR positions for hedging purposes is expressly contemplated by MISO's tariff and market rules.

The strength of this defense lies primarily in the temporal disconnect between the FTR acquisition timeline and the commencement of the alleged manipulative bidding. If the FTR positions were acquired before DPT allegedly began its uneconomic bidding, it is difficult for Staff to establish that the FTR positions were part of a pre-conceived manipulative scheme. However, Staff may counter that the pre-existing FTR positions provided the motive for the subsequent uneconomic bidding — i.e., that DPT recognized it held significant FTR exposure along the Indiana Hub-Minnesota Hub path and then devised the negative bidding strategy to maximize the value of those positions. The engagement team should be prepared to address this alternative narrative.

C. Rebuttal of Market Impact

The expert report of Dr. Leonard Whitfield of Whitfield Economic Advisors LLC, submitted to FERC Staff on November 20, 2023, provides the evidentiary foundation for challenging the disgorgement component of Staff's initial demand. Dr. Whitfield's report is a comprehensive rebuttal of the market impact analysis performed by Dr. Samuel Breck and relied upon by Staff in calculating the $12.8 million disgorgement figure.

Dr. Whitfield's independent analysis, which employs a counterfactual methodology controlling for exogenous market factors, estimates that the actual market impact attributable to DPT's Day-Ahead bidding activity is no more than $2.1 million. This represents approximately 16.4% of Staff's $12.8 million estimate, a differential of $10.7 million. The key findings of the Whitfield report are as follows:

First, Dr. Whitfield's analysis demonstrates that the congestion patterns at the Indiana Hub during the Relevant Period were primarily driven by transmission outage events on the MISO system, not by DPT's Day-Ahead bidding. During the Relevant Period, three major 345kV transmission lines in the Indiana Hub region experienced significant planned maintenance outages, and additional unplanned outages occurred as a result of extreme weather events during the winter of 2022-2023. When these outage events are controlled for in the analysis, the statistical correlation between DPT's bidding and congestion outcomes at the Indiana Hub diminishes substantially.

Second, Dr. Whitfield identifies several methodological flaws in Dr. Breck's analysis, including the use of an overly broad counterfactual baseline, the failure to account for the market impact of other participants' bidding behavior during the same period, and the assumption that all congestion along the Indiana Hub-Minnesota Hub path is attributable to DPT's conduct.

Third, Dr. Whitfield's report concludes that even under the most aggressive assumptions regarding the impact of DPT's bidding on market outcomes, the incremental gains attributable to DPT's FTR and virtual positions cannot reasonably exceed $2.1 million. This substantially undermines the factual basis for the disgorgement component of FERC Staff's demand and should be used as a central element of the negotiation strategy to challenge Staff's $12.8 million disgorgement figure.

D. Mitigating Factors

In addition to the substantive defenses discussed above, Dunmore benefits from several mitigating factors that should be emphasized in settlement discussions and that are relevant to the penalty calculation under the FERC Penalty Guidelines:

Proactive Compliance Measures. Dunmore hired Jennifer Caulfield as Chief Compliance Officer on February 6, 2023 — more than three months before FERC issued its preliminary inquiry letter on May 22, 2023. This demonstrates that Dunmore was taking affirmative steps to strengthen its compliance infrastructure before it became aware of the FERC investigation, which is a significant mitigating factor under the Penalty Guidelines. While the CCO hire was motivated in part by management's awareness of compliance gaps on the trading desk, the timing of the hire predates the investigation and reflects good faith.

Full Cooperation. Dunmore has cooperated fully with the FERC investigation throughout its pendency. The scope of cooperation has been extensive: Dunmore has produced approximately 187,000 documents (comprising approximately 1.24 million pages) from eleven custodians, including all trading records, internal communications, FTR acquisition records, gas nomination records, and compliance files requested by Staff. Dunmore made six employees available for investigative testimony, including the three individuals most directly implicated in Staff's theory: Kyle Renfro (testified September 5, 2023), Anastasia Petrov (testified September 12, 2023), and Derek Sung (testified September 19, 2023). At no point has Dunmore resisted or delayed a production request or sought to narrow the scope of Staff's investigative demands.

Proactive Remediation. On October 15, 2023, Dunmore engaged Ridgeway Compliance Solutions LLC, under the direction of Dr. Carolyn Whitford, to design and implement an enhanced compliance program for Dunmore's energy trading operations. This engagement was undertaken proactively, in advance of any settlement agreement or Commission directive, and represents a substantial investment of both financial resources ($385,000 flat fee) and management attention in remediating the compliance gaps identified during the investigation. The engagement of Ridgeway demonstrates Dunmore's commitment to preventing future violations regardless of the outcome of the current proceeding.

Pre-Existing Compliance Infrastructure. While the engagement team should acknowledge that Dunmore's pre-existing compliance policies were admittedly inadequate in certain respects — particularly with respect to the monitoring of cross-product trading strategies and the documentation of portfolio optimization decisions — the existence of a baseline compliance infrastructure demonstrates that Dunmore was not operating in the absence of any compliance framework. The gaps in the existing program are precisely what motivated the CCO hire and the Ridgeway engagement.

IV. COMPARABLE FERC ENFORCEMENT SETTLEMENTS — BENCHMARKING ANALYSIS

A. Methodology. To establish a credible and defensible settlement target range, C&H has conducted a comprehensive benchmarking analysis of publicly available FERC consent agreements and orders approving settlements in market manipulation cases brought under Section 222 of the Federal Power Act over the past five years (2018-2023). The analysis focused on cases involving alleged manipulation in organized wholesale electricity markets administered by MISO, SPP, PJM Interconnection ("PJM"), ISO New England ("ISO-NE"), and the California Independent System Operator ("CAISO"). For each comparable case, we analyzed the initial demand communicated by FERC Staff, the final settlement terms (including penalty amounts and disgorgement), the nature and scope of any compliance plan requirements, the extent of cooperation credited, and the effective settlement discount relative to Staff's initial demand.

The benchmarking analysis is inherently imperfect because the facts and circumstances of each enforcement action are unique and because certain details of the pre-settlement negotiations are not publicly available. Nevertheless, the analysis provides useful guidance on the range of outcomes that can reasonably be expected in cases with factual and legal profiles comparable to the Dunmore matter.

B. Selected Comparable Cases

Based on our review, the following four cases are the most closely analogous to the Dunmore matter in terms of the type of alleged conduct, the market in which the conduct occurred, and the magnitude of the initial demand:

Comparable Case 1: Uneconomic Virtual Trading in PJM. In this matter, FERC Staff alleged that a power trading company engaged in uneconomic virtual trading in the PJM market designed to benefit a portfolio of related FTR positions. Staff's initial demand was approximately $25 million, consisting of a civil penalty and disgorgement. The respondent cooperated with the investigation and submitted expert evidence challenging the market impact calculations. The matter was resolved by consent agreement for approximately $5 million in civil penalties, with no disgorgement, and a comprehensive compliance plan with a 24-month term. The effective reduction from the initial demand was approximately 80%.

Comparable Case 2: Cross-Product Manipulation in ISO-NE. This matter involved allegations of cross-product manipulation in the ISO-NE market, in which a generation company was alleged to have coordinated physical offers and virtual positions to benefit FTR and other financial positions. Staff's initial demand was approximately $15 million. The matter was resolved for $4 million in civil penalties plus $2 million in disgorgement (total $6 million), with a compliance plan that included independent monitoring. The effective reduction from the initial demand was approximately 60%. This case is notable because it represents a relatively less favorable settlement outcome; the respondent's cooperation was characterized by FERC as adequate but not exceptional, and the respondent did not engage in proactive remediation prior to settlement.

Comparable Case 3: Physical Withholding in MISO. In this case, FERC Staff alleged that a generation owner engaged in physical withholding of generation capacity in the MISO market to inflate locational marginal prices and benefit a portfolio of financial positions. Staff's initial demand was approximately $40 million. The matter was resolved for $8 million in civil penalties, with no disgorgement, and a compliance plan that included an independent compliance monitor. The effective reduction from the initial demand was approximately 80%. The respondent in this case had cooperated fully with the investigation and had implemented a comprehensive compliance program prior to settlement, factors that appear to have contributed to the favorable outcome.

Comparable Case 4: FTR-Related Manipulation. This matter involved allegations that a trading company acquired FTR positions and then engaged in physical and virtual trading designed to increase the value of those positions in an RTO market. Staff's initial demand was approximately $20 million. The matter was resolved for $3.5 million in civil penalties, with no disgorgement, and robust compliance plan commitments including a 36-month monitoring period. The effective reduction from the initial demand was approximately 82.5%. The respondent in this case had proactively engaged a compliance consultant, produced an expert report rebutting Staff's market impact estimates, and made all relevant employees available for testimony — a cooperation profile closely resembling Dunmore's.

The following table summarizes the comparable case data:

It should be noted that the range of settlement discounts across these comparable cases is approximately 60% to 82.5%, with the highest reductions consistently associated with three factors: (1) strong cooperation with the investigation, (2) proactive compliance measures undertaken prior to settlement, and (3) effective rebuttal of Staff's market impact estimates through expert evidence.

C. Key Takeaways

Several key observations emerge from the benchmarking analysis that inform the settlement strategy for the Dunmore matter:

Disgorgement is frequently waived or substantially reduced. In three of the four comparable cases, FERC Staff agreed to waive disgorgement entirely as part of the settlement. The exception was the ISO-NE cross-product case, in which the respondent's cooperation was characterized as merely adequate. This pattern strongly suggests that disgorgement is a negotiable element of FERC settlements and that Staff will agree to waive or substantially reduce disgorgement where the respondent demonstrates that the alleged unjust profits are speculative, difficult to quantify with precision, or effectively rebutted by expert evidence.

Comprehensive compliance plans serve as significant mitigating factors. In all four comparable cases, the consent agreement included a compliance plan with monitoring and reporting requirements. In the cases achieving the highest settlement discounts, the compliance plans were particularly robust, featuring independent monitoring, automated surveillance systems, and extended monitoring periods. This suggests that FERC Staff places substantial value on compliance plan commitments as an enforcement outcome and may accept a lower monetary penalty in exchange for more comprehensive compliance commitments.

Full cooperation and proactive remediation yield favorable outcomes. The cases achieving reductions in the 80%+ range consistently featured respondents who had cooperated fully with the investigation, produced documents without undue delay or objection, made employees available for testimony, and taken proactive steps to address compliance deficiencies before reaching a settlement agreement.

Dunmore's case aligns with the strongest comparables. Dunmore's cooperation profile — including the volume of documents produced, the number of employees made available for testimony, the proactive CCO hire, the engagement of Ridgeway Compliance Solutions, and the submission of Dr. Whitfield's expert report rebutting Staff's market impact estimate — aligns most closely with the respondents in Comparable Cases 3 and 4, which achieved reductions of 80% and 82.5%, respectively. This supports the view that a settlement in the 80%+ reduction range is achievable for Dunmore.

V. SETTLEMENT TARGET RANGE AND WALK-AWAY ANALYSIS

A. Target Range

Based on the analysis of FERC Staff's position (Section II), Dunmore's defenses (Section III), and the comparable settlement data (Section IV), the recommended target settlement range for the Dunmore matter is as follows:

Target Penalty Range: $3 million to $5 million in civil penalties.

Disgorgement: Zero. The negotiation position should be that disgorgement is unwarranted because Staff's $12.8 million unjust profits estimate has been substantively rebutted by Dr. Whitfield's expert analysis, which demonstrates that the actual market impact attributable to DPT's bidding was no more than $2.1 million. Moreover, even the $2.1 million figure represents a gross estimate of market impact, not a precise calculation of unjust profits, and the speculative nature of the disgorgement calculation supports its complete elimination from the settlement.

Opening Position for Negotiations: $3.5 million in civil penalties, no disgorgement. This opening position is aggressive but defensible, representing a reduction of approximately 88.6% from Staff's initial demand. The opening position is anchored by the comparable case data (particularly Comparable Case 4, which settled at $3.5 million) and by the strength of Dr. Whitfield's expert analysis.

Acceptable Resolution Ceiling: $5 million in civil penalties, no disgorgement. This represents the upper bound of the target range and the maximum monetary resolution that should be agreed to without requiring additional client authorization or further analysis of the litigation alternative.

Minimum Savings Target: The minimum acceptable outcome is a resolution representing at least an 80% reduction from FERC Staff's initial demand of $30.8 million. The specific savings at each point in the target range are as follows:

• At $5 million: savings of $25.8 million (83.8% reduction from $30.8 million)

• At $3.5 million: savings of $27.3 million (88.6% reduction from $30.8 million)

• At $3 million: savings of $27.8 million (90.3% reduction from $30.8 million)

B. Walk-Away Point

The walk-away threshold for this matter is any proposed resolution in which the total monetary component exceeds $8 million, whether structured as any penalty exceeding $7 million, or any disgorgement exceeding $1 million, or any combination of penalty and disgorgement that exceeds $8 million in aggregate.

The rationale for this walk-away threshold is as follows: above this level, the litigation alternative — an evidentiary hearing before a FERC ALJ — becomes more economically rational given the strength of Dunmore's defenses, the weaknesses in Staff's position identified in Section II.D, and the costs and risks of continued settlement negotiation at unfavorable terms. A resolution in the $8 million range would represent only a 74% reduction from the initial demand, which falls below the range achieved in the most comparable settlements and does not adequately reflect the mitigating factors present in Dunmore's case.

However, the decision to walk away from negotiations and proceed to litigation must be weighed against the significant risks associated with the litigation alternative, as discussed in detail in Section VI below. These risks include reputational damage, operational disruption, the possibility of a higher ultimate penalty, additional legal costs, and the potential impact on DPT's market-based rate authorization. The walk-away threshold should therefore be treated as a guideline rather than an automatic trigger, and the decision to terminate negotiations should be made in consultation with the client and with full consideration of the circumstances existing at the time.

C. Payment Structure

If a monetary settlement is reached, the engagement team should propose a structured payment arrangement to manage the cash flow impact on Dunmore. Specifically, we recommend proposing payment in two equal installments:

• First Installment: Due within thirty (30) days of the date of the FERC order approving the Stipulation and Consent Agreement.

• Second Installment: Due within one hundred eighty (180) days of the date of the FERC order approving the Stipulation and Consent Agreement.

At the target penalty range of $4 million to $5 million, each installment would be approximately $2 million to $2.5 million. This amount is eminently manageable for DEH given its reported FY 2022 EBITDA of $891 million. The structured payment arrangement is being proposed primarily as a logistical convenience and as a demonstration of good faith flexibility in the negotiation process, rather than out of any concern regarding Dunmore's ability to pay. FERC Staff has accepted similar installment arrangements in prior consent agreements, and this proposal should not be controversial.

VI. LITIGATION RISK ASSESSMENT — ALJ HEARING ALTERNATIVE

A. Procedural Path if Settlement Fails

If the parties are unable to reach a mutually acceptable settlement, FERC Staff would be expected to seek Commission authorization to issue an Order to Show Cause ("OTSC") against Dunmore under Section 222 of the Federal Power Act. The OTSC would formally set forth Staff's allegations and the proposed penalties, and would initiate a public enforcement proceeding.

Upon issuance of an OTSC, Dunmore would have the right to elect an evidentiary hearing before a FERC Administrative Law Judge, pursuant to 18 C.F.R. Part 385, Subpart D. Such a hearing would constitute a de novo evidentiary proceeding in which Staff would bear the burden of proving its allegations by a preponderance of the evidence, and Dunmore would have the opportunity to present its defenses through testimony, documentary evidence, and expert reports. The ALJ would issue an initial decision, which would be subject to review by the full Commission.

As an alternative to the ALJ hearing process, FERC could choose to assess penalties directly against Dunmore by Commission order. In that event, the Commission's penalty assessment would be subject to de novo review in a civil enforcement action brought by the Commission in the appropriate United States District Court under 16 U.S.C. § 823b(d)(3). The federal district court would assess the penalty independently, applying the statutory factors, and the respondent would have the right to a jury trial.

Regardless of whether the matter proceeds through the ALJ hearing process or through federal district court enforcement, the filing of an OTSC or a Commission penalty assessment order would constitute a public proceeding. This means that the non-public nature of the current investigation, which has been maintained pursuant to 18 C.F.R. § 1b.9, would be lost, and all aspects of the proceeding — including the allegations, the evidence, and the identities of the individuals involved — would become matters of public record.

B. Risks of Litigation

The litigation alternative carries significant risks that weigh heavily in favor of a negotiated settlement resolution:

Reputational Damage. The filing of a public enforcement action would expose the FERC investigation to media coverage and public scrutiny. Given the nature of the allegations — market manipulation in wholesale electricity markets — the matter would likely attract attention from energy trade publications, financial news outlets, and potentially mainstream media. Public disclosure of the investigation would carry significant risks for Dunmore's relationships with its key equity investors, particularly Pendleton Capital Partners, LP (which holds 27% of DEH's equity) and Greenvale Infrastructure Fund III (which holds 19% of DEH's equity). Adverse publicity could also damage DPT's relationships with counterparties in the MISO and SPP markets and with the regional transmission organizations themselves.

Stakeholder Preferences. Gavin Harcourt, who serves as Chairman and CEO of DEH and who exercises effective 54% equity control through his direct 38% equity holding and an additional 16% held through the Harcourt Family Trust, has expressed a strong and unequivocal preference for a non-public resolution of the matter. Harcourt has communicated to General Counsel Martin Llewellyn that he views the preservation of Dunmore's reputation and the avoidance of public proceedings as a priority that justifies reasonable financial concessions in the settlement process. This preference should inform, but not dictate, the engagement team's approach to negotiations.

Operational Disruption. A protracted litigation proceeding would impose significant demands on Dunmore's senior management team and trading operations. Key personnel — including Elena Mirova (COO), Derek Sung (SVP, MISO Trading), Rhonda Vasquez (VP, Regulatory Affairs), and Jennifer Caulfield (CCO) — would be required to devote substantial time to litigation preparation, deposition testimony, hearing testimony, and document review, diverting attention from their operational responsibilities. For a company of Dunmore's size and complexity, this operational disruption could have material financial consequences beyond the direct costs of the litigation.

Potential for Higher Penalty. If FERC prevails at an ALJ hearing, the penalty imposed could equal or exceed the initial demand of $30.8 million. The Commission is not bound by Staff's initial demand and could, in the exercise of its discretion, assess a penalty at the upper end of the statutory range. While the probability of a penalty exceeding $30.8 million is relatively low, it is not zero, and the risk of an adverse outcome at hearing must be weighed against the certainty of a known settlement amount.

Additional Legal Costs. Proceeding to an ALJ hearing would generate substantial additional legal costs for Dunmore, estimated at approximately $3 million to $5 million in incremental legal fees for C&H through the conclusion of the hearing and any subsequent appeal. These costs would be in addition to the approximately $3 million in professional fees already incurred or committed through the current stage of the investigation.

Timeline. ALJ proceedings before FERC typically take 12 to 18 months from the issuance of the OTSC to the ALJ's initial decision. Following the initial decision, the matter would be subject to Commission review (which can take an additional 6 to 12 months), and the Commission's final order would be subject to judicial review in the appropriate United States Court of Appeals. The total elapsed time from OTSC issuance to final resolution could therefore be three to four years or longer, during which the matter would remain pending and the associated uncertainty would persist.

Market-Based Rate Risk. A formal adverse finding of market manipulation by the Commission could trigger review proceedings with respect to DPT's market-based rate authorization, which was originally granted in Docket No. ER05-1128-000. Loss or restriction of market-based rate authority would fundamentally impair DPT's ability to participate in wholesale electricity markets and would have severe financial consequences for Dunmore. While a settlement with "neither admit nor deny" language would not constitute an adverse finding for purposes of market-based rate review, a litigated finding of manipulation could trigger such proceedings.

C. Potential Benefits of Litigation

In the interest of completeness, the engagement team should be aware of the potential benefits of proceeding to litigation. If Dunmore's defenses prevail at an ALJ hearing, the result would be a complete vindication of Dunmore's position and the elimination of any penalty or disgorgement obligation. A favorable ruling could also establish precedent reinforcing the portfolio optimization defense in the context of Day-Ahead bidding strategies, which would have value for Dunmore's ongoing trading operations and for the industry more broadly.

However, these potential benefits are substantially outweighed by the risks identified above. The probability of a complete defense victory at an ALJ hearing is uncertain and depends on the composition of the hearing panel, the weight given to Staff's statistical evidence, and the credibility of the witnesses. Moreover, even a favorable outcome at hearing could be reversed on Commission review or judicial appeal, prolonging the uncertainty and costs.

D. Recommendation. Based on the foregoing analysis, settlement is strongly recommended over litigation. The risk-reward calculus decisively favors a negotiated resolution in the $3 million to $5 million range with a comprehensive compliance plan. The potential downside of litigation — including a penalty exceeding the initial demand, $3 million to $5 million in additional legal costs, reputational damage, operational disruption, and risk to DPT's market-based rate authorization — substantially outweighs the potential upside of a complete defense victory. The engagement team should approach the settlement conference with the objective of reaching an agreement within the target range established in Section V.

VII. NEGOTIATION STRATEGY AND TACTICS

A. Opening Strategy at First Settlement Conference

The first settlement conference with FERC Staff is scheduled for December 4, 2023. The C&H team will include the undersigned (Catherine Bloom), Hannah Brinkley as lead associate, and Patrick Gallagher as working associate. The following outlines the strategic approach to be employed at this initial meeting.

The opening presentation should be structured to accomplish four objectives in the following order:

First, emphasize the strength of Dunmore's defenses. The presentation should lead with the portfolio optimization rationale for DPT's Day-Ahead offers, including reference to Derek Sung's testimony regarding the desk's bidding methodology. The presentation should also highlight the FTR hedging timeline, emphasizing that the FTR positions were acquired in MISO auctions months before the Relevant Period commenced and are documented in records already produced to Staff. Most importantly, the presentation should reference Dr. Whitfield's expert report and his conclusion that the actual market impact of DPT's bidding was no more than $2.1 million, a fraction of Staff's $12.8 million estimate.

Second, lead with the cooperation narrative. The presentation should systematically document Dunmore's exceptional cooperation with the investigation, including the production of 187,000 documents from 11 custodians, the testimony of six employees (including the three individuals most central to Staff's theory), the timeliness and completeness of all productions, and Dunmore's proactive engagement with Staff throughout the investigative process. The cooperation narrative should also include the proactive hiring of Jennifer Caulfield as CCO on February 6, 2023 — before the investigation commenced — and the engagement of Ridgeway Compliance Solutions on October 15, 2023 as a proactive remedial measure.

Third, frame the compliance plan as the central deliverable. Rather than positioning the settlement as a purely monetary transaction, the presentation should offer a comprehensive 36-month enhanced compliance plan with independent monitoring as a substantial additional remedial commitment that serves the Commission's enforcement objectives beyond any monetary penalty. This framing creates a path for Staff to recommend a settlement with a lower monetary component while still demonstrating a meaningful enforcement outcome.

Fourth, challenge disgorgement as speculative. The presentation should directly and forcefully argue that disgorgement of $12.8 million is unwarranted because Dr. Whitfield's analysis demonstrates that the figure is based on a flawed causation analysis that fails to account for the primary drivers of congestion at the Indiana Hub. The presentation should emphasize that FERC precedent does not require disgorgement where unjust profits are speculative or cannot be quantified with reasonable certainty.

B. Key Negotiation Levers

The following are the principal negotiation levers available to the engagement team:

Compliance Plan. The compliance plan being developed by Ridgeway Compliance Solutions represents the single most important non-monetary negotiation lever. By offering a detailed, credible compliance plan with robust monitoring, reporting, and enforcement mechanisms, Dunmore can provide FERC Staff with a tangible enforcement outcome that justifies a lower monetary penalty. The compliance plan should be presented as a 36-month commitment that includes independent quarterly audits, automated trade surveillance systems for detecting potential market manipulation patterns in MISO and SPP, annual CEO and CCO compliance certification, and quarterly reporting to FERC OE. The 36-month duration exceeds the typical compliance plan term in FERC settlements, signaling the seriousness of Dunmore's commitment.

Cooperation. Dunmore's cooperation with the investigation has been exemplary by any standard. The engagement team should document this cooperation in specific, quantitative terms and argue that it warrants significant penalty mitigation under the FERC Penalty Guidelines. The Penalty Guidelines expressly provide for reduced penalties where the respondent has self-reported, cooperated with the investigation, and taken remedial measures.

Expert Rebuttal. Dr. Whitfield's expert report provides powerful leverage to undermine the factual predicate for both the penalty and disgorgement components of FERC Staff's demand. The engagement team should use the report not only to challenge the disgorgement calculation directly but also to cast doubt on the broader premise of Staff's case — namely, that DPT's bidding had a significant impact on market outcomes.

Neither Admit Nor Deny. The settlement must include standard "neither admit nor deny" language. This is a non-negotiable requirement for Dunmore. The inclusion of "neither admit nor deny" language is standard practice in FERC consent agreements and should not be a point of contention with Staff. However, Staff occasionally seeks to extract some form of acknowledgment of improper conduct as part of a settlement. The engagement team should resist any such attempt.

Payment Flexibility. The proposal for structured payment in two installments (30 days and 180 days following the FERC order) should be presented as a logistical accommodation that facilitates prompt resolution. This lever is relatively minor but may serve Staff's interest in expedient case closure.

C. Concessions Available

The following concessions are available to the engagement team in the course of negotiations, and may be offered strategically to achieve the target settlement range:

• Dunmore is willing to accept a penalty of up to $5 million if disgorgement is waived entirely.

• Dunmore is willing to extend the compliance monitoring period to up to 36 months and to accept robust monitoring terms, including independent quarterly audits and automated trade surveillance.

• Dunmore is willing to commit to continuing cooperation with any related FERC investigations involving the same or related conduct.

• Dunmore is willing to implement automated trade surveillance technology as a specific compliance deliverable, with implementation timelines and specifications to be set forth in the consent agreement.

• Dunmore is willing to provide annual compliance certifications from both CEO Gavin Harcourt and CCO Jennifer Caulfield, signed under penalty of perjury, for the duration of the compliance monitoring period.

D. Red Lines / Non-Negotiable Terms

The following terms are non-negotiable and represent absolute constraints on the engagement team's authority in settlement discussions:

• No disgorgement exceeding $1 million. Any disgorgement component exceeding $1 million triggers the walk-away threshold and requires express client authorization before further discussion.

• No admission of liability. The consent agreement must include standard "neither admit nor deny" language. Any settlement that requires Dunmore to admit to a violation of Section 222 of the Federal Power Act or 18 C.F.R. § 1c.2 is unacceptable.

• No individual penalties or sanctions against named traders or executives. The consent agreement must not include individual penalties, sanctions, bars, or other adverse actions against Kyle Renfro, Anastasia Petrov, Derek Sung, Elena Mirova, Gavin Harcourt, or any other named individual.

• No suspension or revocation of market-based rate authorization. The consent agreement must not include any provision suspending, revoking, or conditioning DPT's market-based rate authorization (Docket No. ER05-1128-000), and must not include language that could be construed as an adverse finding triggering a separate MBR review proceeding.

• Walk-away if total monetary resolution exceeds $8 million. As discussed in Section V.B, the engagement team should not agree to any resolution in which the total monetary component (penalty plus disgorgement) exceeds $8 million without express client authorization.

E. Anticipated FERC Staff Counter-Moves

Based on our experience in FERC enforcement matters and our assessment of Staff's negotiation posture in this case, the engagement team should anticipate the following counter-moves from FERC Staff:

Staff may reduce the penalty but insist on some disgorgement component. Staff is likely to view disgorgement as a separate enforcement tool that serves a distinct remedial purpose (returning unjust profits to the market) apart from the punitive function of the civil penalty. Staff may therefore be reluctant to waive disgorgement entirely, even if the penalty is reduced, because waiving disgorgement could be perceived as allowing Dunmore to retain the proceeds of alleged manipulation. The engagement team should counter this position by emphasizing Dr. Whitfield's analysis and arguing that there are no quantifiable unjust profits to disgorge. If Staff insists on some disgorgement component as a face-saving measure, the engagement team may consider accepting a nominal disgorgement amount (e.g., $500,000 or less) only if the total monetary resolution remains within the target range.

Staff may challenge Whitfield's methodology and reassert Breck's $12.8 million figure. FERC Staff's economists will have reviewed Dr. Whitfield's report and will likely identify points of disagreement with his methodology and conclusions. Staff may reassert Dr. Breck's market impact estimate as the more reliable analysis and argue that Whitfield's approach understates the actual market impact. The engagement team should be prepared to defend the Whitfield methodology in detail and to highlight the specific methodological flaws in Breck's analysis that Whitfield has identified.

Staff may push for a shorter compliance plan with less robust monitoring. Counterintuitively, Staff may prefer a shorter compliance plan (e.g., 24 months rather than 36 months) with less onerous monitoring requirements, particularly if Staff views an extended monitoring period as creating ongoing administrative burden for OE staff. The engagement team should counter by offering the more robust plan as a trade-off for a lower penalty, framing it as a value proposition: a more comprehensive compliance plan delivers greater enforcement value and justifies a larger discount on the monetary component.

Staff may seek individual sanctions or commitments regarding specific traders. Staff may seek to include provisions in the consent agreement that impose specific obligations or restrictions on Kyle Renfro, Anastasia Petrov, or Derek Sung — for example, requirements that specific individuals complete additional training, face enhanced supervisory oversight, or be prohibited from certain trading activities. The engagement team should firmly resist any such provisions, which are non-negotiable red lines for Dunmore. The appropriate response is to emphasize that the compliance plan addresses institutional deficiencies and that individual supervision is a matter of internal corporate governance.

VIII. ROLE OF THE COMPLIANCE PLAN IN SETTLEMENT

A. Status of Compliance Plan Development

Ridgeway Compliance Solutions LLC was engaged by Dunmore on October 15, 2023, under the direction of Dr. Carolyn Whitford, a recognized expert in energy market compliance with extensive experience designing compliance programs for entities subject to FERC jurisdiction. The engagement is for a flat fee of $385,000 and encompasses the design, documentation, and initial implementation of an enhanced compliance program for Dunmore's energy trading operations across all organized wholesale electricity markets in which DPT participates.

Design of the compliance plan is substantially underway. Dr. Whitford and her team have conducted initial assessments of Dunmore's existing compliance infrastructure, interviewed key personnel (including Jennifer Caulfield, Derek Sung, Rhonda Vasquez, and members of the trading desk), and begun drafting the compliance plan documentation. A draft compliance plan is expected to be available for C&H review by mid-December 2023, which would position the engagement team to share the plan with FERC Staff during the second round of settlement discussions.

Jennifer Caulfield, who was hired as CCO on February 6, 2023, is coordinating the compliance plan development internally and serving as the primary point of contact between Ridgeway and Dunmore's operating personnel. Caulfield is working in close coordination with Rhonda Vasquez, VP of Regulatory Affairs, who brings institutional knowledge of Dunmore's existing compliance policies and FERC regulatory requirements.

B. Key Compliance Plan Elements to Propose

The following elements should be included in the compliance plan to be proposed as part of the settlement:

CCO Reporting Structure. Designation of Jennifer Caulfield as Chief Compliance Officer, reporting directly to the DEH Board of Directors rather than through the management chain. This reporting structure ensures the independence of the compliance function and provides the CCO with direct access to board-level oversight.

Annual Compliance Training. Mandatory annual compliance training for all trading personnel, with a minimum of sixteen (16) hours per year per trader. The training program should cover FERC's Anti-Manipulation Rule, the Commission's Penalty Guidelines, market rules applicable to MISO and SPP, cross-product trading restrictions, proper documentation of bidding rationale, and the specific types of conduct that gave rise to the current investigation.

Quarterly Compliance Audits. Independent quarterly compliance audits conducted by Ridgeway Compliance Solutions (or a successor independent monitor approved by FERC OE) for the duration of the 36-month monitoring period. The audi

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
November 28, 2023
FROM: Catherine Bloom, Responsible Partner, Calderwood & Harkness LLP
TO: Alan Ngo, Billing Partner; Hannah Brinkley, Lead Associate; Patrick Gallagher, Working Associate
RE: Settlement Strategy and Negotiation Framework — Dunmore Energy Holdings Ltd. & Dunmore Power Trading LLC — FERC Docket No. IN23-7-000
C&H Matter Number: 1016-00004
C&H Billing Code: 71420.00001
I. PURPOSE AND SCOPE OF MEMORANDUM
This memorandum sets forth the settlement strategy and negotiation framework for resolving the Federal Energy Regulatory Commission ("FERC" or "Commission") Office of Enforcement ("OE") investigation, docketed as FERC Docket No. IN23-7-000, of Dunmore Energy Holdings Ltd. ("DEH") and its wholly owned subsidiary, Dunmore Power Trading LLC ("DPT," and together with DEH, "Dunmore"). This memorandum is intended to guide the Calderwood & Harkness LLP ("C&H") engagement team in preparation for the first settlement conference with FERC Enforcement Staff ("FERC Staff" or "Staff"), which is anticipated to take place in early December 2023 and is currently scheduled for December 4, 2023.
By way of context and procedural background, FERC's Division of Investigations issued a preliminary inquiry letter to Dunmore on May 22, 2023. The investigation has proceeded on a non-public basis pursuant to 18 C.F.R. § 1b.9. C&H was engaged pursuant to an engagement letter dated May 24, 2023, and has since been actively managing Dunmore's response to the investigation. Over the course of the investigation, C&H has coordinated the production of approximately 187,000 documents (comprising approximately 1.24 million pages) from eleven custodians, prepared six Dunmore employees for and accompanied them to investigative testimony sessions, and engaged in substantive dialogue with FERC Staff regarding the scope and theories underlying the investigation.
On October 10, 2023, a meeting with FERC Enforcement leadership took place at which Staff communicated FERC's preliminary position on the matter, including the potential for settlement discussions. On November 6, 2023, C&H submitted Dunmore's formal Response to FERC Staff's Preliminary Findings letter, setting forth Dunmore's defenses and challenging both the factual basis and the legal sufficiency of Staff's allegations. On November 20, 2023, Dr. Leonard Whitfield of Whitfield Economic Advisors LLC submitted his independent expert report rebutting the market impact analysis performed by FERC Staff's economist.
FERC Staff's initial demand, as communicated in the Preliminary Findings letter and reiterated in subsequent discussions, totals $30.8 million, consisting of $18 million in civil penalties and $12.8 million in disgorgement of alleged unjust profits. Dunmore's settlement objective, as confirmed by General Counsel Martin Llewellyn and consistent with the preferences expressed by Chairman and CEO Gavin Harcourt, is to achieve a resolution at the lowest defensible amount while avoiding formal litigation before a FERC Administrative Law Judge ("ALJ"). This memorandum provides the analytical framework for accomplishing that objective.
The sections that follow analyze FERC Staff's position and the strengths and weaknesses thereof, assess Dunmore's available defenses, benchmark the matter against comparable FERC enforcement settlements, establish a target settlement range and walk-away threshold, evaluate the litigation alternative, outline the negotiation strategy and specific tactics to be employed at the first settlement conference, discuss the role of the compliance plan in the settlement framework, present a financial impact analysis for the client, and set forth a proposed timeline and the authorizations required to proceed.
II. SUMMARY OF FERC STAFF'S POSITION AND INITIAL DEMAND
A. The Alleged Conduct
FERC Staff's Preliminary Findings letter, dated September 29, 2023, alleges that Dunmore engaged in a multi-faceted scheme of market manipulation in the Midcontinent Independent System Operator ("MISO") organized wholesale electricity market during a period spanning approximately 14.5 months, from January 3, 2022, through March 17, 2023 (the "Relevant Period"). Staff's theory of manipulation rests on three interrelated categories of allegedly improper conduct:
Uneconomic Day-Ahead Bidding. First, Staff alleges that DPT's Senior Trader Kyle Renfro submitted persistent uneconomic Day-Ahead generation offers at the Indiana Hub, pricing DPT's gas-fired generation assets at levels as low as negative $15/MWh to negative $40/MWh — prices that Staff contends were significantly below the marginal cost of production for the relevant generating units. Staff contends that these offers lacked any legitimate economic rationale and were instead designed to create or exacerbate congestion patterns at the Indiana Hub that would benefit DPT's Financial Transmission Rights ("FTR") portfolio and related virtual trading positions.
Cross-Product Manipulation. Second, Staff alleges that DPT's trader Anastasia Petrov submitted Real-Time virtual positions — specifically, Increment Offers ("INCs") and Decrement Bids ("DECs") — at the Minnesota Hub that were designed to amplify the congestion differentials created by the uneconomic Day-Ahead offers submitted by Renfro at the Indiana Hub. According to Staff, the virtual positions at the Minnesota Hub were not entered for their own independent economic merit but rather as a complementary component of a coordinated cross-product strategy intended to maximize the value of DPT's FTR positions along the Indiana Hub-Minnesota Hub path.
Physical-Financial Coordination. Third, Staff alleges that DPT coordinated gas nominations through Dunmore Midstream Partners LP ("DMP"), a DEH affiliate, to support the uneconomic generation offers and mask the true marginal cost of the gas-fired generating units. Staff contends that DMP's gas nominations were structured to create the appearance that DPT's generation offers were economically justified by low-cost gas supply, when in fact the gas was being supplied at below-market rates through intra-company arrangements that did not reflect arm's-length pricing.
During the Relevant Period, Staff has identified approximately 2,840 GWh of allegedly uneconomic Day-Ahead generation offers at the Indiana Hub, FTR positions with a total notional value of approximately $47.3 million, and approximately 1,620 GWh of virtual transactions at the Minnesota Hub. The volume and duration of the alleged conduct are central to Staff's contention that this was a sustained manipulative scheme rather than an isolated trading decision.
B. FERC Staff's Penalty Calculation
FERC Staff's initial demand of $30.8 million is composed of the following elements:
Civil Penalty. Staff has calculated a base penalty of $9 million, derived from the FERC Penalty Guidelines and the factors set forth therein for evaluating the seriousness of market manipulation violations. Staff has then applied a 2× multiplier to the base penalty, citing both the duration of the alleged scheme (14.5 months) and the scope of the alleged conduct (encompassing Day-Ahead physical offers, Real-Time virtual positions, and coordinated gas nominations across multiple market products and geographic locations within MISO). This yields a total civil penalty demand of $18 million.
Disgorgement. In addition to the civil penalty, Staff seeks disgorgement of $12.8 million, representing Staff's estimate of the unjust profits that Dunmore obtained as a result of the alleged manipulative conduct. Staff's disgorgement calculation is based on an analysis by Dr. Samuel Breck, a Senior Economist in FERC's Division of Analytics and Surveillance, which estimates the incremental gains attributable to DPT's FTR positions and virtual trading profits during the Relevant Period, net of the losses incurred on the allegedly uneconomic generation offers.
Total Initial Demand. The total initial demand is therefore $18 million (civil penalty) plus $12.8 million (disgorgement) = $30.8 million.
Staff's penalty calculation is made pursuant to and calculated under the FERC Penalty Guidelines and Section 316A of the Federal Power Act ("FPA"), 16 U.S.C. § 825o-1, which authorizes the Commission to assess civil penalties of up to $1,000,000 per violation per day for violations of Part II of the FPA or any rule or order thereunder. The statutory basis for the underlying violation is Section 222 of the FPA, 16 U.S.C. § 824v, which prohibits the use of any manipulative or deceptive device or contrivance in connection with the purchase or sale of electric energy or the purchase or sale of transmission services subject to FERC jurisdiction, as further implemented by the Commission's Anti-Manipulation Rule, 18 C.F.R. § 1c.2.
C. Strengths of FERC Staff's Position
Any realistic assessment of Dunmore's settlement position requires candid acknowledgment of the strengths of FERC Staff's case. The engagement team should be aware of the following factors, each of which lends some facial support to Staff's theory of manipulation:
First, the pattern of persistent negative-price offers over a period of approximately 14.5 months creates a facially troubling record. While Dunmore has legitimate explanations for these offers (discussed in Section III below), the sustained duration and depth of the negative pricing — offers as low as negative $40/MWh — will be difficult to explain away entirely and will create an unfavorable narrative if the matter proceeds to a public forum.
Second, DPT's contemporaneous FTR positions benefited materially from the congestion patterns observed at the Indiana Hub during the Relevant Period. While correlation does not establish causation, the alignment of economic interests between the allegedly uneconomic offers and the profitable FTR positions provides Staff with a plausible inference of manipulative motive.
Third, there exists a documented temporal correlation between DPT's Day-Ahead bidding activity and congestion outcomes at the Indiana Hub. This correlation was initially identified and flagged by Velthorn Market Analytics, Inc., the MISO Independent Market Monitor ("IMM"), under the direction of Dr. Patricia Engel. The correlation was subsequently analyzed in greater detail by Dr. Samuel Breck of FERC's Division of Analytics and Surveillance. The involvement of both the IMM and FERC's internal economists lends analytical credibility to the statistical foundation of Staff's case.
Fourth, FERC Staff has obtained communications between Renfro and Petrov — principally instant messages and emails exchanged on DPT's internal communication systems — that Staff may seek to characterize as evidence of a coordinated cross-product strategy. While the content of these communications, as we understand them, is largely innocuous when viewed in context, certain isolated exchanges could be subject to adverse characterization in a public proceeding.
Fifth, Senior Vice President Derek Sung's supervisory role over all fourteen traders on the MISO desk, including both Renfro and Petrov, provides Staff with a basis for arguing institutional awareness of, and acquiescence to, the trading patterns at issue. This creates a risk that Staff could characterize the alleged scheme as a desk-wide strategy rather than the independent actions of individual traders.
D. Weaknesses of FERC Staff's Position
Notwithstanding the foregoing, FERC Staff's position contains several significant vulnerabilities that should be leveraged in settlement negotiations:
First, and most significantly, Staff's market impact calculation of $12.8 million in unjust profits relies on assumptions about causation that Dr. Whitfield's independent expert analysis has substantially rebutted. Dr. Whitfield's report, submitted on November 20, 2023, concludes that the actual market impact attributable to DPT's Day-Ahead bidding activity is no more than $2.1 million. The $10.7 million differential between Staff's estimate and Dr. Whitfield's estimate is attributable primarily to Staff's failure to account for confounding variables, most notably the significant transmission outage events that occurred during the Relevant Period and that were the primary drivers of the congestion patterns at the Indiana Hub.
Second, Dr. Whitfield's analysis demonstrates that the congestion patterns at the Indiana Hub that Staff attributes to DPT's bidding were, in fact, primarily driven by transmission outage events on the MISO system, including planned maintenance outages on three major 345kV transmission lines and unplanned outages resulting from extreme weather events in the winter of 2022-2023. When these exogenous factors are properly controlled for, the residual impact of DPT's bidding on congestion outcomes is substantially diminished.
Third, DPT's FTR positions along the Indiana Hub-Minnesota Hub path were acquired in MISO's annual and monthly FTR auctions months before the Relevant Period began, with the majority of positions acquired in MISO's annual FTR auction in November 2021. This acquisition timeline is inconsistent with a manipulative scheme that purportedly commenced in January 2022 and undercuts Staff's inference that the FTR positions were acquired as part of a coordinated plan to profit from manufactured congestion. The FTR acquisition records, which have been produced to Staff as part of the 187,000-document production, support the conclusion that the FTR positions were acquired as a routine hedging mechanism for DPT's generation portfolio.
Fourth, negative Day-Ahead generation offers are not per se manipulative under established FERC precedent. The Commission has recognized that below-cost offers can be economically rational in certain circumstances, including when portfolio optimization considerations, contractual minimum generation commitments, and opportunity costs are taken into account. Dunmore's defenses on this point are discussed in greater detail in Section III.A below.
Fifth, FERC Staff has not demonstrated the element of scienter with the specificity required under the Commission's Anti-Manipulation Rule and governing case law. The Preliminary Findings letter relies heavily on inferences drawn from trading patterns and statistical correlations rather than direct evidence of manipulative intent. While circumstantial evidence can satisfy the scienter element, Staff's case on intent is inferential rather than documentary, and the internal communications obtained by Staff do not, in our assessment, contain the "smoking gun" evidence that would establish a conscious and deliberate intent to manipulate market outcomes.
III. ASSESSMENT OF DUNMORE'S DEFENSES
A. Portfolio Optimization Defense
Dunmore's principal defense to the allegation of uneconomic Day-Ahead bidding is that DPT's negative-price offers at the Indiana Hub reflected a legitimate portfolio optimization strategy that was economically rational when viewed in the context of DPT's full generation and trading portfolio.
Specifically, DPT's Day-Ahead offers took into account several factors beyond the simple marginal cost of production at individual generating units. These factors included opportunity costs associated with committing generating units in the Day-Ahead market versus reserving capacity for the Real-Time market, contractual minimum generation commitments under long-term power purchase agreements and tolling agreements that required DPT to maintain certain generating units at minimum output levels, and the integrated value of generation across DPT's full portfolio of generating assets in the MISO and Southwest Power Pool ("SPP") footprints. When these portfolio-level considerations are taken into account, offers that appear uneconomic on a unit-specific basis may in fact represent economically rational decisions designed to maximize the overall value of the portfolio.
This defense is supported by industry practice and FERC precedent. The Commission and its ALJs have recognized in several proceedings that below-cost offers can be economically justified when a market participant can demonstrate a legitimate business purpose that extends beyond the individual transaction at issue. Portfolio optimization is a widely recognized and accepted practice in organized wholesale electricity markets, and many sophisticated market participants employ similar methodologies to optimize the dispatch and commitment of their generation portfolios.
Derek Sung, who served as Senior Vice President with supervisory responsibility over the MISO desk, provided testimony on September 19, 2023, in which he described the bidding methodology employed by DPT as standard practice for the trading desk. Sung testified that the pricing algorithms used to generate Day-Ahead offers incorporated portfolio-level inputs and were designed to maximize the net value of DPT's generation across multiple market products and locations. His testimony, if credited, provides a contemporaneous business justification for the bidding patterns at issue.
However, the engagement team should be aware of certain limitations of this defense. First, while portfolio optimization is a recognized practice, FERC Staff may argue that the magnitude and persistence of the negative pricing — offers as deep as negative $40/MWh sustained over 14.5 months — exceed what can be explained by legitimate portfolio considerations. Second, the defense is somewhat undermined by the absence of contemporaneous documentation explicitly memorializing the portfolio optimization rationale for specific offers. Sung's testimony provides some support, but the defense would be stronger if there were written policies or internal analyses showing that the negative offers were the output of a documented portfolio optimization process.
B. FTR Hedging Defense
DPT maintains that its FTR positions along the Indiana Hub-Minnesota Hub path served a routine hedging function for DPT's generation portfolio and were not acquired as part of any manipulative scheme. This defense rests on the following factual predicates:
DPT's FTR positions were acquired in MISO's annual and monthly FTR auctions well in advance of the Relevant Period. The majority of the positions were acquired in MISO's annual FTR auction conducted in November 2021, approximately six weeks before the Relevant Period commenced on January 3, 2022. Additional positions were acquired in MISO's monthly FTR auctions during the first quarter of 2022, consistent with DPT's ongoing portfolio hedging activities. The acquisition timing and the purpose of the FTR positions are documented in FTR acquisition records, internal trade tickets, and portfolio management system records, all of which have been produced to FERC Staff as part of the 187,000-document production.
The FTR positions were acquired to hedge the basis risk inherent in DPT's generation portfolio. As an owner and operator of gas-fired generating assets located at or near the Indiana Hub, DPT was exposed to basis risk arising from the difference between locational marginal prices at the Indiana Hub and other MISO pricing nodes. The FTR positions provided a financial hedge against adverse congestion outcomes that could reduce the value of DPT's generation output. This is a standard and widely accepted use of FTRs in organized wholesale electricity markets, and the acquisition of FTR positions for hedging purposes is expressly contemplated by MISO's tariff and market rules.
The strength of this defense lies primarily in the temporal disconnect between the FTR acquisition timeline and the commencement of the alleged manipulative bidding. If the FTR positions were acquired before DPT allegedly began its uneconomic bidding, it is difficult for Staff to establish that the FTR positions were part of a pre-conceived manipulative scheme. However, Staff may counter that the pre-existing FTR positions provided the motive for the subsequent uneconomic bidding — i.e., that DPT recognized it held significant FTR exposure along the Indiana Hub-Minnesota Hub path and then devised the negative bidding strategy to maximize the value of those positions. The engagement team should be prepared to address this alternative narrative.
C. Rebuttal of Market Impact
The expert report of Dr. Leonard Whitfield of Whitfield Economic Advisors LLC, submitted to FERC Staff on November 20, 2023, provides the evidentiary foundation for challenging the disgorgement component of Staff's initial demand. Dr. Whitfield's report is a comprehensive rebuttal of the market impact analysis performed by Dr. Samuel Breck and relied upon by Staff in calculating the $12.8 million disgorgement figure.
Dr. Whitfield's independent analysis, which employs a counterfactual methodology controlling for exogenous market factors, estimates that the actual market impact attributable to DPT's Day-Ahead bidding activity is no more than $2.1 million. This represents approximately 16.4% of Staff's $12.8 million estimate, a differential of $10.7 million. The key findings of the Whitfield report are as follows:
First, Dr. Whitfield's analysis demonstrates that the congestion patterns at the Indiana Hub during the Relevant Period were primarily driven by transmission outage events on the MISO system, not by DPT's Day-Ahead bidding. During the Relevant Period, three major 345kV transmission lines in the Indiana Hub region experienced significant planned maintenance outages, and additional unplanned outages occurred as a result of extreme weather events during the winter of 2022-2023. When these outage events are controlled for in the analysis, the statistical correlation between DPT's bidding and congestion outcomes at the Indiana Hub diminishes substantially.
Second, Dr. Whitfield identifies several methodological flaws in Dr. Breck's analysis, including the use of an overly broad counterfactual baseline, the failure to account for the market impact of other participants' bidding behavior during the same period, and the assumption that all congestion along the Indiana Hub-Minnesota Hub path is attributable to DPT's conduct.
Third, Dr. Whitfield's report concludes that even under the most aggressive assumptions regarding the impact of DPT's bidding on market outcomes, the incremental gains attributable to DPT's FTR and virtual positions cannot reasonably exceed $2.1 million. This substantially undermines the factual basis for the disgorgement component of FERC Staff's demand and should be used as a central element of the negotiation strategy to challenge Staff's $12.8 million disgorgement figure.
D. Mitigating Factors
In addition to the substantive defenses discussed above, Dunmore benefits from several mitigating factors that should be emphasized in settlement discussions and that are relevant to the penalty calculation under the FERC Penalty Guidelines:
Proactive Compliance Measures. Dunmore hired Jennifer Caulfield as Chief Compliance Officer on February 6, 2023 — more than three months before FERC issued its preliminary inquiry letter on May 22, 2023. This demonstrates that Dunmore was taking affirmative steps to strengthen its compliance infrastructure before it became aware of the FERC investigation, which is a significant mitigating factor under the Penalty Guidelines. While the CCO hire was motivated in part by management's awareness of compliance gaps on the trading desk, the timing of the hire predates the investigation and reflects good faith.
Full Cooperation. Dunmore has cooperated fully with the FERC investigation throughout its pendency. The scope of cooperation has been extensive: Dunmore has produced approximately 187,000 documents (comprising approximately 1.24 million pages) from eleven custodians, including all trading records, internal communications, FTR acquisition records, gas nomination records, and compliance files requested by Staff. Dunmore made six employees available for investigative testimony, including the three individuals most directly implicated in Staff's theory: Kyle Renfro (testified September 5, 2023), Anastasia Petrov (testified September 12, 2023), and Derek Sung (testified September 19, 2023). At no point has Dunmore resisted or delayed a production request or sought to narrow the scope of Staff's investigative demands.
Proactive Remediation. On October 15, 2023, Dunmore engaged Ridgeway Compliance Solutions LLC, under the direction of Dr. Carolyn Whitford, to design and implement an enhanced compliance program for Dunmore's energy trading operations. This engagement was undertaken proactively, in advance of any settlement agreement or Commission directive, and represents a substantial investment of both financial resources ($385,000 flat fee) and management attention in remediating the compliance gaps identified during the investigation. The engagement of Ridgeway demonstrates Dunmore's commitment to preventing future violations regardless of the outcome of the current proceeding.
Pre-Existing Compliance Infrastructure. While the engagement team should acknowledge that Dunmore's pre-existing compliance policies were admittedly inadequate in certain respects — particularly with respect to the monitoring of cross-product trading strategies and the documentation of portfolio optimization decisions — the existence of a baseline compliance infrastructure demonstrates that Dunmore was not operating in the absence of any compliance framework. The gaps in the existing program are precisely what motivated the CCO hire and the Ridgeway engagement.
IV. COMPARABLE FERC ENFORCEMENT SETTLEMENTS — BENCHMARKING ANALYSIS
A. Methodology. To establish a credible and defensible settlement target range, C&H has conducted a comprehensive benchmarking analysis of publicly available FERC consent agreements and orders approving settlements in market manipulation cases brought under Section 222 of the Federal Power Act over the past five years (2018-2023). The analysis focused on cases involving alleged manipulation in organized wholesale electricity markets administered by MISO, SPP, PJM Interconnection ("PJM"), ISO New England ("ISO-NE"), and the California Independent System Operator ("CAISO"). For each comparable case, we analyzed the initial demand communicated by FERC Staff, the final settlement terms (including penalty amounts and disgorgement), the nature and scope of any compliance plan requirements, the extent of cooperation credited, and the effective settlement discount relative to Staff's initial demand.
The benchmarking analysis is inherently imperfect because the facts and circumstances of each enforcement action are unique and because certain details of the pre-settlement negotiations are not publicly available. Nevertheless, the analysis provides useful guidance on the range of outcomes that can reasonably be expected in cases with factual and legal profiles comparable to the Dunmore matter.
B. Selected Comparable Cases
Based on our review, the following four cases are the most closely analogous to the Dunmore matter in terms of the type of alleged conduct, the market in which the conduct occurred, and the magnitude of the initial demand:
Comparable Case 1: Uneconomic Virtual Trading in PJM. In this matter, FERC Staff alleged that a power trading company engaged in uneconomic virtual trading in the PJM market designed to benefit a portfolio of related FTR positions. Staff's initial demand was approximately $25 million, consisting of a civil penalty and disgorgement. The respondent cooperated with the investigation and submitted expert evidence challenging the market impact calculations. The matter was resolved by consent agreement for approximately $5 million in civil penalties, with no disgorgement, and a comprehensive compliance plan with a 24-month term. The effective reduction from the initial demand was approximately 80%.
Comparable Case 2: Cross-Product Manipulation in ISO-NE. This matter involved allegations of cross-product manipulation in the ISO-NE market, in which a generation company was alleged to have coordinated physical offers and virtual positions to benefit FTR and other financial positions. Staff's initial demand was approximately $15 million. The matter was resolved for $4 million in civil penalties plus $2 million in disgorgement (total $6 million), with a compliance plan that included independent monitoring. The effective reduction from the initial demand was approximately 60%. This case is notable because it represents a relatively less favorable settlement outcome; the respondent's cooperation was characterized by FERC as adequate but not exceptional, and the respondent did not engage in proactive remediation prior to settlement.
Comparable Case 3: Physical Withholding in MISO. In this case, FERC Staff alleged that a generation owner engaged in physical withholding of generation capacity in the MISO market to inflate locational marginal prices and benefit a portfolio of financial positions. Staff's initial demand was approximately $40 million. The matter was resolved for $8 million in civil penalties, with no disgorgement, and a compliance plan that included an independent compliance monitor. The effective reduction from the initial demand was approximately 80%. The respondent in this case had cooperated fully with the investigation and had implemented a comprehensive compliance program prior to settlement, factors that appear to have contributed to the favorable outcome.
Comparable Case 4: FTR-Related Manipulation. This matter involved allegations that a trading company acquired FTR positions and then engaged in physical and virtual trading designed to increase the value of those positions in an RTO market. Staff's initial demand was approximately $20 million. The matter was resolved for $3.5 million in civil penalties, with no disgorgement, and robust compliance plan commitments including a 36-month monitoring period. The effective reduction from the initial demand was approximately 82.5%. The respondent in this case had proactively engaged a compliance consultant, produced an expert report rebutting Staff's market impact estimates, and made all relevant employees available for testimony — a cooperation profile closely resembling Dunmore's.
The following table summarizes the comparable case data:
It should be noted that the range of settlement discounts across these comparable cases is approximately 60% to 82.5%, with the highest reductions consistently associated with three factors: (1) strong cooperation with the investigation, (2) proactive compliance measures undertaken prior to settlement, and (3) effective rebuttal of Staff's market impact estimates through expert evidence.
C. Key Takeaways
Several key observations emerge from the benchmarking analysis that inform the settlement strategy for the Dunmore matter:
Disgorgement is frequently waived or substantially reduced. In three of the four comparable cases, FERC Staff agreed to waive disgorgement entirely as part of the settlement. The exception was the ISO-NE cross-product case, in which the respondent's cooperation was characterized as merely adequate. This pattern strongly suggests that disgorgement is a negotiable element of FERC settlements and that Staff will agree to waive or substantially reduce disgorgement where the respondent demonstrates that the alleged unjust profits are speculative, difficult to quantify with precision, or effectively rebutted by expert evidence.
Comprehensive compliance plans serve as significant mitigating factors. In all four comparable cases, the consent agreement included a compliance plan with monitoring and reporting requirements. In the cases achieving the highest settlement discounts, the compliance plans were particularly robust, featuring independent monitoring, automated surveillance systems, and extended monitoring periods. This suggests that FERC Staff places substantial value on compliance plan commitments as an enforcement outcome and may accept a lower monetary penalty in exchange for more comprehensive compliance commitments.
Full cooperation and proactive remediation yield favorable outcomes. The cases achieving reductions in the 80%+ range consistently featured respondents who had cooperated fully with the investigation, produced documents without undue delay or objection, made employees available for testimony, and taken proactive steps to address compliance deficiencies before reaching a settlement agreement.
Dunmore's case aligns with the strongest comparables. Dunmore's cooperation profile — including the volume of documents produced, the number of employees made available for testimony, the proactive CCO hire, the engagement of Ridgeway Compliance Solutions, and the submission of Dr. Whitfield's expert report rebutting Staff's market impact estimate — aligns most closely with the respondents in Comparable Cases 3 and 4, which achieved reductions of 80% and 82.5%, respectively. This supports the view that a settlement in the 80%+ reduction range is achievable for Dunmore.
V. SETTLEMENT TARGET RANGE AND WALK-AWAY ANALYSIS
A. Target Range
Based on the analysis of FERC Staff's position (Section II), Dunmore's defenses (Section III), and the comparable settlement data (Section IV), the recommended target settlement range for the Dunmore matter is as follows:
Target Penalty Range: $3 million to $5 million in civil penalties.
Disgorgement: Zero. The negotiation position should be that disgorgement is unwarranted because Staff's $12.8 million unjust profits estimate has been substantively rebutted by Dr. Whitfield's expert analysis, which demonstrates that the actual market impact attributable to DPT's bidding was no more than $2.1 million. Moreover, even the $2.1 million figure represents a gross estimate of market impact, not a precise calculation of unjust profits, and the speculative nature of the disgorgement calculation supports its complete elimination from the settlement.
Opening Position for Negotiations: $3.5 million in civil penalties, no disgorgement. This opening position is aggressive but defensible, representing a reduction of approximately 88.6% from Staff's initial demand. The opening position is anchored by the comparable case data (particularly Comparable Case 4, which settled at $3.5 million) and by the strength of Dr. Whitfield's expert analysis.
Acceptable Resolution Ceiling: $5 million in civil penalties, no disgorgement. This represents the upper bound of the target range and the maximum monetary resolution that should be agreed to without requiring additional client authorization or further analysis of the litigation alternative.
Minimum Savings Target: The minimum acceptable outcome is a resolution representing at least an 80% reduction from FERC Staff's initial demand of $30.8 million. The specific savings at each point in the target range are as follows:
• At $5 million: savings of $25.8 million (83.8% reduction from $30.8 million)
• At $3.5 million: savings of $27.3 million (88.6% reduction from $30.8 million)
• At $3 million: savings of $27.8 million (90.3% reduction from $30.8 million)
B. Walk-Away Point
The walk-away threshold for this matter is any proposed resolution in which the total monetary component exceeds $8 million, whether structured as any penalty exceeding $7 million, or any disgorgement exceeding $1 million, or any combination of penalty and disgorgement that exceeds $8 million in aggregate.
The rationale for this walk-away threshold is as follows: above this level, the litigation alternative — an evidentiary hearing before a FERC ALJ — becomes more economically rational given the strength of Dunmore's defenses, the weaknesses in Staff's position identified in Section II.D, and the costs and risks of continued settlement negotiation at unfavorable terms. A resolution in the $8 million range would represent only a 74% reduction from the initial demand, which falls below the range achieved in the most comparable settlements and does not adequately reflect the mitigating factors present in Dunmore's case.
However, the decision to walk away from negotiations and proceed to litigation must be weighed against the significant risks associated with the litigation alternative, as discussed in detail in Section VI below. These risks include reputational damage, operational disruption, the possibility of a higher ultimate penalty, additional legal costs, and the potential impact on DPT's market-based rate authorization. The walk-away threshold should therefore be treated as a guideline rather than an automatic trigger, and the decision to terminate negotiations should be made in consultation with the client and with full consideration of the circumstances existing at the time.
C. Payment Structure
If a monetary settlement is reached, the engagement team should propose a structured payment arrangement to manage the cash flow impact on Dunmore. Specifically, we recommend proposing payment in two equal installments:
• First Installment: Due within thirty (30) days of the date of the FERC order approving the Stipulation and Consent Agreement.
• Second Installment: Due within one hundred eighty (180) days of the date of the FERC order approving the Stipulation and Consent Agreement.
At the target penalty range of $4 million to $5 million, each installment would be approximately $2 million to $2.5 million. This amount is eminently manageable for DEH given its reported FY 2022 EBITDA of $891 million. The structured payment arrangement is being proposed primarily as a logistical convenience and as a demonstration of good faith flexibility in the negotiation process, rather than out of any concern regarding Dunmore's ability to pay. FERC Staff has accepted similar installment arrangements in prior consent agreements, and this proposal should not be controversial.
VI. LITIGATION RISK ASSESSMENT — ALJ HEARING ALTERNATIVE
A. Procedural Path if Settlement Fails
If the parties are unable to reach a mutually acceptable settlement, FERC Staff would be expected to seek Commission authorization to issue an Order to Show Cause ("OTSC") against Dunmore under Section 222 of the Federal Power Act. The OTSC would formally set forth Staff's allegations and the proposed penalties, and would initiate a public enforcement proceeding.
Upon issuance of an OTSC, Dunmore would have the right to elect an evidentiary hearing before a FERC Administrative Law Judge, pursuant to 18 C.F.R. Part 385, Subpart D. Such a hearing would constitute a de novo evidentiary proceeding in which Staff would bear the burden of proving its allegations by a preponderance of the evidence, and Dunmore would have the opportunity to present its defenses through testimony, documentary evidence, and expert reports. The ALJ would issue an initial decision, which would be subject to review by the full Commission.
As an alternative to the ALJ hearing process, FERC could choose to assess penalties directly against Dunmore by Commission order. In that event, the Commission's penalty assessment would be subject to de novo review in a civil enforcement action brought by the Commission in the appropriate United States District Court under 16 U.S.C. § 823b(d)(3). The federal district court would assess the penalty independently, applying the statutory factors, and the respondent would have the right to a jury trial.
Regardless of whether the matter proceeds through the ALJ hearing process or through federal district court enforcement, the filing of an OTSC or a Commission penalty assessment order would constitute a public proceeding. This means that the non-public nature of the current investigation, which has been maintained pursuant to 18 C.F.R. § 1b.9, would be lost, and all aspects of the proceeding — including the allegations, the evidence, and the identities of the individuals involved — would become matters of public record.
B. Risks of Litigation
The litigation alternative carries significant risks that weigh heavily in favor of a negotiated settlement resolution:
Reputational Damage. The filing of a public enforcement action would expose the FERC investigation to media coverage and public scrutiny. Given the nature of the allegations — market manipulation in wholesale electricity markets — the matter would likely attract attention from energy trade publications, financial news outlets, and potentially mainstream media. Public disclosure of the investigation would carry significant risks for Dunmore's relationships with its key equity investors, particularly Pendleton Capital Partners, LP (which holds 27% of DEH's equity) and Greenvale Infrastructure Fund III (which holds 19% of DEH's equity). Adverse publicity could also damage DPT's relationships with counterparties in the MISO and SPP markets and with the regional transmission organizations themselves.
Stakeholder Preferences. Gavin Harcourt, who serves as Chairman and CEO of DEH and who exercises effective 54% equity control through his direct 38% equity holding and an additional 16% held through the Harcourt Family Trust, has expressed a strong and unequivocal preference for a non-public resolution of the matter. Harcourt has communicated to General Counsel Martin Llewellyn that he views the preservation of Dunmore's reputation and the avoidance of public proceedings as a priority that justifies reasonable financial concessions in the settlement process. This preference should inform, but not dictate, the engagement team's approach to negotiations.
Operational Disruption. A protracted litigation proceeding would impose significant demands on Dunmore's senior management team and trading operations. Key personnel — including Elena Mirova (COO), Derek Sung (SVP, MISO Trading), Rhonda Vasquez (VP, Regulatory Affairs), and Jennifer Caulfield (CCO) — would be required to devote substantial time to litigation preparation, deposition testimony, hearing testimony, and document review, diverting attention from their operational responsibilities. For a company of Dunmore's size and complexity, this operational disruption could have material financial consequences beyond the direct costs of the litigation.
Potential for Higher Penalty. If FERC prevails at an ALJ hearing, the penalty imposed could equal or exceed the initial demand of $30.8 million. The Commission is not bound by Staff's initial demand and could, in the exercise of its discretion, assess a penalty at the upper end of the statutory range. While the probability of a penalty exceeding $30.8 million is relatively low, it is not zero, and the risk of an adverse outcome at hearing must be weighed against the certainty of a known settlement amount.
Additional Legal Costs. Proceeding to an ALJ hearing would generate substantial additional legal costs for Dunmore, estimated at approximately $3 million to $5 million in incremental legal fees for C&H through the conclusion of the hearing and any subsequent appeal. These costs would be in addition to the approximately $3 million in professional fees already incurred or committed through the current stage of the investigation.
Timeline. ALJ proceedings before FERC typically take 12 to 18 months from the issuance of the OTSC to the ALJ's initial decision. Following the initial decision, the matter would be subject to Commission review (which can take an additional 6 to 12 months), and the Commission's final order would be subject to judicial review in the appropriate United States Court of Appeals. The total elapsed time from OTSC issuance to final resolution could therefore be three to four years or longer, during which the matter would remain pending and the associated uncertainty would persist.
Market-Based Rate Risk. A formal adverse finding of market manipulation by the Commission could trigger review proceedings with respect to DPT's market-based rate authorization, which was originally granted in Docket No. ER05-1128-000. Loss or restriction of market-based rate authority would fundamentally impair DPT's ability to participate in wholesale electricity markets and would have severe financial consequences for Dunmore. While a settlement with "neither admit nor deny" language would not constitute an adverse finding for purposes of market-based rate review, a litigated finding of manipulation could trigger such proceedings.
C. Potential Benefits of Litigation
In the interest of completeness, the engagement team should be aware of the potential benefits of proceeding to litigation. If Dunmore's defenses prevail at an ALJ hearing, the result would be a complete vindication of Dunmore's position and the elimination of any penalty or disgorgement obligation. A favorable ruling could also establish precedent reinforcing the portfolio optimization defense in the context of Day-Ahead bidding strategies, which would have value for Dunmore's ongoing trading operations and for the industry more broadly.
However, these potential benefits are substantially outweighed by the risks identified above. The probability of a complete defense victory at an ALJ hearing is uncertain and depends on the composition of the hearing panel, the weight given to Staff's statistical evidence, and the credibility of the witnesses. Moreover, even a favorable outcome at hearing could be reversed on Commission review or judicial appeal, prolonging the uncertainty and costs.
D. Recommendation. Based on the foregoing analysis, settlement is strongly recommended over litigation. The risk-reward calculus decisively favors a negotiated resolution in the $3 million to $5 million range with a comprehensive compliance plan. The potential downside of litigation — including a penalty exceeding the initial demand, $3 million to $5 million in additional legal costs, reputational damage, operational disruption, and risk to DPT's market-based rate authorization — substantially outweighs the potential upside of a complete defense victory. The engagement team should approach the settlement conference with the objective of reaching an agreement within the target range established in Section V.
VII. NEGOTIATION STRATEGY AND TACTICS
A. Opening Strategy at First Settlement Conference
The first settlement conference with FERC Staff is scheduled for December 4, 2023. The C&H team will include the undersigned (Catherine Bloom), Hannah Brinkley as lead associate, and Patrick Gallagher as working associate. The following outlines the strategic approach to be employed at this initial meeting.
The opening presentation should be structured to accomplish four objectives in the following order:
First, emphasize the strength of Dunmore's defenses. The presentation should lead with the portfolio optimization rationale for DPT's Day-Ahead offers, including reference to Derek Sung's testimony regarding the desk's bidding methodology. The presentation should also highlight the FTR hedging timeline, emphasizing that the FTR positions were acquired in MISO auctions months before the Relevant Period commenced and are documented in records already produced to Staff. Most importantly, the presentation should reference Dr. Whitfield's expert report and his conclusion that the actual market impact of DPT's bidding was no more than $2.1 million, a fraction of Staff's $12.8 million estimate.
Second, lead with the cooperation narrative. The presentation should systematically document Dunmore's exceptional cooperation with the investigation, including the production of 187,000 documents from 11 custodians, the testimony of six employees (including the three individuals most central to Staff's theory), the timeliness and completeness of all productions, and Dunmore's proactive engagement with Staff throughout the investigative process. The cooperation narrative should also include the proactive hiring of Jennifer Caulfield as CCO on February 6, 2023 — before the investigation commenced — and the engagement of Ridgeway Compliance Solutions on October 15, 2023 as a proactive remedial measure.
Third, frame the compliance plan as the central deliverable. Rather than positioning the settlement as a purely monetary transaction, the presentation should offer a comprehensive 36-month enhanced compliance plan with independent monitoring as a substantial additional remedial commitment that serves the Commission's enforcement objectives beyond any monetary penalty. This framing creates a path for Staff to recommend a settlement with a lower monetary component while still demonstrating a meaningful enforcement outcome.
Fourth, challenge disgorgement as speculative. The presentation should directly and forcefully argue that disgorgement of $12.8 million is unwarranted because Dr. Whitfield's analysis demonstrates that the figure is based on a flawed causation analysis that fails to account for the primary drivers of congestion at the Indiana Hub. The presentation should emphasize that FERC precedent does not require disgorgement where unjust profits are speculative or cannot be quantified with reasonable certainty.
B. Key Negotiation Levers
The following are the principal negotiation levers available to the engagement team:
Compliance Plan. The compliance plan being developed by Ridgeway Compliance Solutions represents the single most important non-monetary negotiation lever. By offering a detailed, credible compliance plan with robust monitoring, reporting, and enforcement mechanisms, Dunmore can provide FERC Staff with a tangible enforcement outcome that justifies a lower monetary penalty. The compliance plan should be presented as a 36-month commitment that includes independent quarterly audits, automated trade surveillance systems for detecting potential market manipulation patterns in MISO and SPP, annual CEO and CCO compliance certification, and quarterly reporting to FERC OE. The 36-month duration exceeds the typical compliance plan term in FERC settlements, signaling the seriousness of Dunmore's commitment.
Cooperation. Dunmore's cooperation with the investigation has been exemplary by any standard. The engagement team should document this cooperation in specific, quantitative terms and argue that it warrants significant penalty mitigation under the FERC Penalty Guidelines. The Penalty Guidelines expressly provide for reduced penalties where the respondent has self-reported, cooperated with the investigation, and taken remedial measures.
Expert Rebuttal. Dr. Whitfield's expert report provides powerful leverage to undermine the factual predicate for both the penalty and disgorgement components of FERC Staff's demand. The engagement team should use the report not only to challenge the disgorgement calculation directly but also to cast doubt on the broader premise of Staff's case — namely, that DPT's bidding had a significant impact on market outcomes.
Neither Admit Nor Deny. The settlement must include standard "neither admit nor deny" language. This is a non-negotiable requirement for Dunmore. The inclusion of "neither admit nor deny" language is standard practice in FERC consent agreements and should not be a point of contention with Staff. However, Staff occasionally seeks to extract some form of acknowledgment of improper conduct as part of a settlement. The engagement team should resist any such attempt.
Payment Flexibility. The proposal for structured payment in two installments (30 days and 180 days following the FERC order) should be presented as a logistical accommodation that facilitates prompt resolution. This lever is relatively minor but may serve Staff's interest in expedient case closure.
C. Concessions Available
The following concessions are available to the engagement team in the course of negotiations, and may be offered strategically to achieve the target settlement range:
• Dunmore is willing to accept a penalty of up to $5 million if disgorgement is waived entirely.
• Dunmore is willing to extend the compliance monitoring period to up to 36 months and to accept robust monitoring terms, including independent quarterly audits and automated trade surveillance.
• Dunmore is willing to commit to continuing cooperation with any related FERC investigations involving the same or related conduct.
• Dunmore is willing to implement automated trade surveillance technology as a specific compliance deliverable, with implementation timelines and specifications to be set forth in the consent agreement.
• Dunmore is willing to provide annual compliance certifications from both CEO Gavin Harcourt and CCO Jennifer Caulfield, signed under penalty of perjury, for the duration of the compliance monitoring period.
D. Red Lines / Non-Negotiable Terms
The following terms are non-negotiable and represent absolute constraints on the engagement team's authority in settlement discussions:
• No disgorgement exceeding $1 million. Any disgorgement component exceeding $1 million triggers the walk-away threshold and requires express client authorization before further discussion.
• No admission of liability. The consent agreement must include standard "neither admit nor deny" language. Any settlement that requires Dunmore to admit to a violation of Section 222 of the Federal Power Act or 18 C.F.R. § 1c.2 is unacceptable.
• No individual penalties or sanctions against named traders or executives. The consent agreement must not include individual penalties, sanctions, bars, or other adverse actions against Kyle Renfro, Anastasia Petrov, Derek Sung, Elena Mirova, Gavin Harcourt, or any other named individual.
• No suspension or revocation of market-based rate authorization. The consent agreement must not include any provision suspending, revoking, or conditioning DPT's market-based rate authorization (Docket No. ER05-1128-000), and must not include language that could be construed as an adverse finding triggering a separate MBR review proceeding.
• Walk-away if total monetary resolution exceeds $8 million. As discussed in Section V.B, the engagement team should not agree to any resolution in which the total monetary component (penalty plus disgorgement) exceeds $8 million without express client authorization.
E. Anticipated FERC Staff Counter-Moves
Based on our experience in FERC enforcement matters and our assessment of Staff's negotiation posture in this case, the engagement team should anticipate the following counter-moves from FERC Staff:
Staff may reduce the penalty but insist on some disgorgement component. Staff is likely to view disgorgement as a separate enforcement tool that serves a distinct remedial purpose (returning unjust profits to the market) apart from the punitive function of the civil penalty. Staff may therefore be reluctant to waive disgorgement entirely, even if the penalty is reduced, because waiving disgorgement could be perceived as allowing Dunmore to retain the proceeds of alleged manipulation. The engagement team should counter this position by emphasizing Dr. Whitfield's analysis and arguing that there are no quantifiable unjust profits to disgorge. If Staff insists on some disgorgement component as a face-saving measure, the engagement team may consider accepting a nominal disgorgement amount (e.g., $500,000 or less) only if the total monetary resolution remains within the target range.
Staff may challenge Whitfield's methodology and reassert Breck's $12.8 million figure. FERC Staff's economists will have reviewed Dr. Whitfield's report and will likely identify points of disagreement with his methodology and conclusions. Staff may reassert Dr. Breck's market impact estimate as the more reliable analysis and argue that Whitfield's approach understates the actual market impact. The engagement team should be prepared to defend the Whitfield methodology in detail and to highlight the specific methodological flaws in Breck's analysis that Whitfield has identified.
Staff may push for a shorter compliance plan with less robust monitoring. Counterintuitively, Staff may prefer a shorter compliance plan (e.g., 24 months rather than 36 months) with less onerous monitoring requirements, particularly if Staff views an extended monitoring period as creating ongoing administrative burden for OE staff. The engagement team should counter by offering the more robust plan as a trade-off for a lower penalty, framing it as a value proposition: a more comprehensive compliance plan delivers greater enforcement value and justifies a larger discount on the monetary component.
Staff may seek individual sanctions or commitments regarding specific traders. Staff may seek to include provisions in the consent agreement that impose specific obligations or restrictions on Kyle Renfro, Anastasia Petrov, or Derek Sung — for example, requirements that specific individuals complete additional training, face enhanced supervisory oversight, or be prohibited from certain trading activities. The engagement team should firmly resist any such provisions, which are non-negotiable red lines for Dunmore. The appropriate response is to emphasize that the compliance plan addresses institutional deficiencies and that individual supervision is a matter of internal corporate governance.
VIII. ROLE OF THE COMPLIANCE PLAN IN SETTLEMENT
A. Status of Compliance Plan Development
Ridgeway Compliance Solutions LLC was engaged by Dunmore on October 15, 2023, under the direction of Dr. Carolyn Whitford, a recognized expert in energy market compliance with extensive experience designing compliance programs for entities subject to FERC jurisdiction. The engagement is for a flat fee of $385,000 and encompasses the design, documentation, and initial implementation of an enhanced compliance program for Dunmore's energy trading operations across all organized wholesale electricity markets in which DPT participates.
Design of the compliance plan is substantially underway. Dr. Whitford and her team have conducted initial assessments of Dunmore's existing compliance infrastructure, interviewed key personnel (including Jennifer Caulfield, Derek Sung, Rhonda Vasquez, and members of the trading desk), and begun drafting the compliance plan documentation. A draft compliance plan is expected to be available for C&H review by mid-December 2023, which would position the engagement team to share the plan with FERC Staff during the second round of settlement discussions.
Jennifer Caulfield, who was hired as CCO on February 6, 2023, is coordinating the compliance plan development internally and serving as the primary point of contact between Ridgeway and Dunmore's operating personnel. Caulfield is working in close coordination with Rhonda Vasquez, VP of Regulatory Affairs, who brings institutional knowledge of Dunmore's existing compliance policies and FERC regulatory requirements.
B. Key Compliance Plan Elements to Propose
The following elements should be included in the compliance plan to be proposed as part of the settlement:
CCO Reporting Structure. Designation of Jennifer Caulfield as Chief Compliance Officer, reporting directly to the DEH Board of Directors rather than through the management chain. This reporting structure ensures the independence of the compliance function and provides the CCO with direct access to board-level oversight.
Annual Compliance Training. Mandatory annual compliance training for all trading personnel, with a minimum of sixteen (16) hours per year per trader. The training program should cover FERC's Anti-Manipulation Rule, the Commission's Penalty Guidelines, market rules applicable to MISO and SPP, cross-product trading restrictions, proper documentation of bidding rationale, and the specific types of conduct that gave rise to the current investigation.
Quarterly Compliance Audits. Independent quarterly compliance audits conducted by Ridgeway Compliance Solutions (or a successor independent monitor approved by FERC OE) for the duration of the 36-month monitoring period. The audi

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MEMORANDUM

I. PURPOSE AND SCOPE OF MEMORANDUM

II. SUMMARY OF FERC STAFF'S POSITION AND INITIAL DEMAND

III. ASSESSMENT OF DUNMORE'S DEFENSES

V. SETTLEMENT TARGET RANGE AND WALK-AWAY ANALYSIS

VII. NEGOTIATION STRATEGY AND TACTICS

VIII. ROLE OF THE COMPLIANCE PLAN IN SETTLEMENT

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