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Legal Responsibility

Appeal Brief Appeal Letter

Appeal Brief

DisasterFEMA-1675-DR
ApplicantMid-Kansas Electric Company, LLC
Appeal TypeSecond
PA ID#XXX-XXXXX
PW ID#XXXX
Date Signed2008-09-03T04:00:00
Citation: FEMA-1675-DR-KS Mid-Kansas Electric Company, LLC (Applicant)

Cross-reference: Legal Responsibility

Summary: On September 21, 2005, Mid-Kansas Electric Company, LLC, a Kansas non-profit public utility (Applicant) signed a contract to purchase the electric generation, transmission, and distribution assets of Aquila, Inc., a for-profit investor-owned utility (Seller), operating in Kansas and four other states. The contract required the Applicant to reimburse Aquila for any repairs Aquila made to the assets after the agreement was signed as a result of extraordinary or catastrophic weather. The reimbursement would be reflected in an upward adjustment of the purchase price at closing.
A severe winter storm struck the state of Kansas on December 28, 2006, and severely damaged the assets to be purchased by the Applicant. The Applicant submitted a claim for the full amount of the repair cost to FEMA before Aquila transferred the assets to the Applicant on April 1, 2007. On April 11, 2007, FEMA denied the Applicant’s claim for reimbursement of repair costs because FEMA determined that the Applicant did not have legal responsibility to repair the damaged Aquila property at the time of the incident. The Regional Administrator sustained this determination on first appeal in a letter dated October 17, 2007.
The Applicant submitted a second appeal on December 16, 2007, citing Kansas law as precedent and the basis for a favorable judgment. A copy of the purchase agreement and affidavits from corporate officers, attesting to the terms of the agreement was provided.

Issues: Was the Applicant legally responsible for the repairs to the Aquila property?

Findings: No.

Rationale: 44 CFR §206.223.

Appeal Letter

August 3, 2008

William M. Chornyak
Deputy Director
Kansas Division of Emergency Management
2800 SW Topeka Boulevard
Topeka, Kansas 66611-1287

Re: Second Appeal–Mid-Kansas Electric Company, LLC, Legal Responsibility,
FEMA-1675-DR-KS

Dear Mr. Chornyak:

This is in response to your letter dated February 8, 2008, which transmitted the referenced second appeal on behalf of Mid-Kansas Electric Company, LLC (Applicant). The Applicant is appealing the Department of Homeland Security’s Federal Emergency Management Agency’s (FEMA) decision to deny assistance for the repair of disaster-related damage to its facilities.

On September 21, 2005, the Applicant signed a contract with Aquila, Inc, a for-profit investor-owned utility company (Seller), to purchase Aquila’s electric generation, transmission and distribution assets. The contract stated that Aquila would repair any extraordinary weather-related damage to its facilities prior to closing and add the costs to the purchase price at closing. A severe winter storm struck the State of Kansas on December 28, 2006, damaging the assets that the Applicant contracted to purchase. The President declared the storm a major disaster on January 7, 2007. The Applicant sought reimbursement from FEMA for the costs to repair the disaster-related damage. The Applicant and Seller closed the transaction on April 1, 2007. FEMA denied the Applicant’s request on April 11, 2007, because it determined that the Applicant did not have legal responsibility for the repairs when the disaster occurred. The Regional Administrator sustained this decision on first appeal on October 27, 2007.

The Applicant submitted a second appeal on December 16, 2007, stating that the purchase agreement established its legal responsibility for the repair of disaster-related damage. It cited Kansas law as precedent and the basis for a favorable judgment. The Applicant provided a copy of the purchase agreement and affidavits from corporate officers attesting to the terms of the agreement.
On April 10, 2008, James Walke, FEMA Public Assistance Division Director, met with Norman Williams, representing the Applicant, and representatives of the Kansas Electric Cooperatives and the Kansas congressional delegation in Congressman Jerry Moran’s office in Washington, D.C., to discuss the appeal. The primary issue in the appeal is whether the provision of the
purchase agreement that states that the Applicant’s purchase price would be increased at closing to cover the Seller’s repair costs for disaster-related damage meets the requirements of 44 CFR §206.223(a)(3). More specifically, is the legal responsibility for the cost of the repairs the same as the legal responsibility to perform the work? 44 CFR §206.223(a)(3) states that, to be eligible for reimbursement, an item of work must be the legal responsibility of an eligible applicant.

The legal responsibility to repair a facility usually resides with the owner of the facility, unless the owner transfers that responsibility to another party by lease or other legal instrument. In the current case, the purchase agreement stated that the Seller (owner) would increase the purchase price of the facilities to include costs that the Seller incurred in making disaster repairs to the facilities. Under the agreement, only the Seller had responsibility for repairs. There is no dispute, however, that the Applicant was contractually responsible, at closing, for any costs the Seller incurred to repair the facilities. The Applicant, on the other hand, argues that its participation on the Transition Committee demonstrates that it was legally responsible for repairs. Section 7.1(b) of the Purchase Agreement states, “A committee comprised of one Person designated by the Seller and one Person designated by the Buyer…will be established promptly following the execution of the Agreement to examine transition issues relating to or arising in connection with the transactions contemplated hereby….” This provision does not give the Applicant authority to participate in, or take responsibility for, any process that would determine what repairs were made, when repairs were made, and by whom repairs were made, and especially, how much would be paid for repairs. Rather, it states that the Applicant will pay a higher purchase price for the facilities if the Seller made disaster-related repairs.
Based on a review of all information submitted with the appeal, we have determined that the Applicant’s agreement to pay a higher purchase price for the facilities does not reach the legal responsibility standard as described in 44 CFR §206.223(a)(3). Accordingly, the Applicant’s appeal is denied.

Please inform the Applicant of my decision. My determination constitutes the final decision on this matter as set forth in 44 CFR §206.206.

Sincerely,
/s/
Carlos J. Castillo
Assistant Administrator
Disaster Assistance Directorate

cc: Richard Hainje
Regional Administrator
FEMA Region VII