Even though my question is broadly applicable to everyone who replaces normal damage Im asking specifically in regards to Dormammu. When he does his colossal retalation and rolls a critical hit, does he do 3 damage or 2?

Critical hit always modifies the damage dealt so it would work. It is referencing that normal damage is non-penetrating damage.

Forgive me for being pedantic but I'm not convinced by what you said. I mean, you've won 2 more WKO tournaments then I have so you definitely have more experience than me but I noticed a couple flaws in your reasoning that I would like to point out. One is that normal damage can be either penetrating or non penetrating so saying "penetrating instead of normal damage" has to mean more than just that the damage is now penetrating. Furthermore, I believe that the standard terminology used to make non-penetrating damage penetrate is already "damage dealt is penetrating" so why would they use new words to describe an established effect? My second point against your assessment is that you seem to be implying that by increasing the damage dealt a critical hit is outside of normal damage but the clarification of normal damage is that it is the damage dealt from an attack using the attacker's calculated damage value. So if I'm already replacing the damage dealt with something else, why wouldn't that include the 1 extra damage being dealt by a critical hit? I guess that what I'm trying to say here is, is that your final answer?
ps. I hope I'm not coming off as rude here, I really appreciate you coming in and helping me figure this out.

Questions are always good! It helps clarify things so no worries.

Addressing the second point first. If it is ruled that this penetrating vs normal damage is a replacement effect (not entirely sure that it is a replacement effect but has the same idea anyway) the rule is replace, then modify. Critical hit damage is the modifier that is always applied after the replacement effect has taken place. So replace my 4 damage with 2 penetrating damage takes place, then you can modify it further with Crit Hit damage.

You are correct looking at the clarification that normal damage can be penetrating or non-penetrating. Looking at the online clarifications section:

Everything here is referenced to damage value. So normal damage is that which is calculated on damage value. So if I attack with a damage value of 4 but it says everyone takes 2 penetrating instead of normal, it means the 2 instead of the 4 (including any modifiers like perplex or enhancement done to the 4). This doesn't mean damage dealt - damage dealt is not the same as value which is why the crit hit damage will work.

Definition of normal damage from WIN rules E&C
Note that Colossal Retaliation does not fix damage dealt at 2 damage. So it can still be modified by thngs like critical hits or effects that ignores damage dealt.

Also from the E and C (as linked by mirandir)

"CRITICAL HITS
[C]A critical hit increases the damage dealt to any character hit by an attack that deals damage, even if the character was not a target of the attack or was assigned 0 damage."

What is the damage dealt by Dormammu's Retaliation? 2 Penetrating Damage. So, a Critical Hit increases that to 3.