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Second Appeal Analysis
PA ID# 000-UXYVD-00; Twin Valley Electric Cooperative, Inc.
PW ID# 1236; Reasonable Costs, Legal Responsibility
In December 2007, ice accumulation from a winter storm damaged over 100 miles of Twin Valley Electric Cooperative, Inc.’s (Applicant) overhead rural electric distribution system (Facility). In Project Worksheet (PW) 1236, FEMA authorized work to repair and reconductor multiple line segments with upgraded #2 Aluminum Conductor Steel Reinforced and relocate some lines to areas closer to roads. The total estimated project cost was $4,838,623.00. In July 2011, the Applicant requested $2,562,780.00 in additional costs because it expended all previously approved funding but completed only 65 percent of the work. Based on the work completed at the time, the Applicant reported incurring higher costs per mile than what was initially estimated. FEMA obligated the additional funding but stated it would review actual costs for reasonableness. This revised the overall estimate to $7,401,403.00.
At closeout, the Applicant claimed $8,327,546.36 in actual costs. FEMA questioned the reasonableness of the costs because they were significantly higher than previous estimates. After comparing the costs claimed to those funded for similar work on PW 1240 for the same event, but for a different applicant, FEMA deduced from PW 1240 that it was reasonable to use the average per pole cost of $2,187.20 plus $222.00 for drilling in rocky soil. This yielded an average cost per pole of $2,409.20 for PW 1236. Using the average of 22 poles per rural mile, FEMA calculated a need to install 2,607 poles (multiplied by $2,409.20) and established $6,280,784.40 as a reasonable total cost for the work performed.
Apart from the primary issue of the reasonableness of actual costs, FEMA also identified $1,085,831.13 for ineligible work and costs that pertained to secondary eligibility issues. FEMA provided various reasons for denying the work, including the following: (1) right of way (ROW) clearance attributed to normal maintenance and not directly related to the event; (2) costs incorrectly claimed as direct administrative costs (DAC); (3) ineligible pole upgrades; (4) materials used to restore secondary lines that were not included in the original scope of work; (5) water and ice provided to employees without a legal obligation to do so; (6) incorrect equipment rates; (7) standby time for equipment; (8) data entry errors associated with equipment hours and DAC related to a different PW; (9) personal supplies (tools and safety gear) provided to employees without justification; and (10) unreasonable costs claimed for cargo trailers.
In January 2014, FEMA notified the Kansas Division of Emergency Management (Grantee) of its closeout determination, which approved a total of $6,280,784.40 in eligible costs.
By letter dated March 14, 2014, the Applicant appealed for an additional $2,027,409.89 in Public Assistance (PA) funding, asserting FEMA’s closeout determination improperly denied funding requested for “actual reasonable costs” incurred to complete eligible work that FEMA approved in PW 1236. According to the Applicant, it incurred additional costs to complete work in an area comprised primarily of solid rock. As a result of the difficult terrain and extensive amount of damage to its system, the Applicant asserted the work required hiring additional staff, longer workdays, and specialized equipment, which increased project costs. In May 2014, it provided additional information to support the first appeal in response to questions raised by the Grantee.
The Applicant pointed out flaws in the method that FEMA used to determine reasonable costs and provided a data table and map showing that Labette County contained harder soil composed of more restrictive layers than other counties in Kansas. It objected to FEMA’s use of average per pole costs from only one other cooperative as a basis to limit the Applicant’s actual costs, arguing such action was contrary to The Robert T. Stafford Disaster Relief and Emergency Assistance Act and FEMA’s guidance on establishing reasonable costs.
The Applicant contended that using an average per pole cost to cap costs does not comply with federal cost principles, which define reasonable costs as those “which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost.” Further, FEMA gave no indication the Applicant acted imprudently in making critical decisions for the project. The Applicant acknowledged it incurred higher than average costs but argued that these costs were necessary and reasonable due to difficulties caused primarily by drilling through bedrock, in order to complete the approved scope of work within FEMA’s required timeframe. Furthermore, the Applicant listed several options that it eliminated as unfeasible alternatives to the specialized drilling apparatus method ultimately chosen. The Applicant disagreed with FEMA’s position that its costs were unreasonable based on FEMA’s belief that doing the work costs less on other terrain, emphasizing that FEMA did not directly challenge the Applicant’s method to complete the work.
The Applicant also analyzed the expenses categorized as secondary eligibility issues that FEMA denied. It did not dispute the denial of $19,352.07 for various data entry errors. It objected to FEMA’s denial of $1,066,479.06 for other expenses, arguing the claimed costs were eligible and reasonable. The Applicant stated: (1) ROW clearance was necessary to execute the scope of work and a direct result of the event; (2) costs claimed as DAC were appropriate except for $653.72 for bush removal which should be allowed as eligible ROW clearance, instead; (3) pole upgrades were compliant with policy and identified as eligible work on the FEMA PW; (4) secondary wire was damaged by the event and repaired in order to restore the system; (5) it allowed costs for water and ice purchased by employees in the field because it normally provides the items in the office; (6) the actual equipment rates were reasonable for the specialized equipment used under extreme circumstances, and the Grantee approved the rates; (7) staff used the equipment continuously throughout the day; (8) it did not dispute the data entry errors associated with equipment hours and DAC; (9) although its union contract generally requires employees to provide their own personal supplies (e.g., tools and safety gear), it was reasonable for the Applicant to replace the items for temporary employees and because the employees performed work outside their normal duties; and (10) it clarified that the cargo trailers were necessary to transport and secure materials on site.
In a forwarding letter dated May 16, 2014, the Grantee partially supported the Applicant’s appeal. The Grantee agreed that FEMA’s reasonable cost comparison was improper because it did not reimburse the Applicant for its actual reasonable costs for eligible work. However, the Grantee supported FEMA’s denial of the costs claimed for providing employees with water, ice and personal supplies because they were outside the scope of work. Additionally, the Grantee stated that the Applicant did not show that costs for personal supplies were extraordinary, beyond what would normally be required to perform the work.
FEMA Region VII sent the Applicant a final Request for Information (RFI) on March 23, 2015. Through it, FEMA requested specific documentation demonstrating the Applicant’s requirement to provide water, ice, and personal supplies to its employees. FEMA also requested the Applicant demonstrate the hours required to dig holes for pole installation.
On April 22, 2015, the Applicant responded and claimed it normally provided employees with water and ice from its office. However, due to the distance between project sites and the home office, it made more sense for the Applicant to reimburse employees for their costs to purchase water and ice instead of asking them to travel back to the home office. It reiterated that generally employees are required to provide their own tools and basic personal safety items pursuant to the Applicant’s union contract. However, the Applicant replaced these items when needed because of the extreme conditions and extraordinary circumstances associated with the project. Although it claimed that replacing the items was consistent with standard operating procedures, the Applicant acknowledged it could not demonstrate an obligation to do so. As for the amount of time to dig holes, the Applicant responded that it did not separately track actual costs or time per pole, as it was not required by FEMA.
On July 7, 2015, the FEMA Region VII Regional Administrator (RA) partially granted the Applicant’s first appeal. The first appeal determination authorized an additional $1,073,585.88 for eligible costs but denied $953,824.01 as ineligible for Public Assistance.
The RA affirmed the decision to test for reasonableness because of the substantial difference between estimated and actual costs. The RA affirmed the method FEMA used to evaluate reasonableness based on the adjusted average cost per pole, noting that PW 1240 provided a common basis that was suitable for comparison and weighted in favor of the Applicant. She determined FEMA’s allowance for drilling in rocky terrain was sufficient. Furthermore, apart from its assertions that FEMA should pay the claim in full because it completed the approved scope of work, the Applicant did not identify an alternative method that FEMA could use to test reasonableness.
Additionally, the RA found the higher equipment rate and intermittent equipment usage were substantiated but that the rate was factored into the reasonable cost calculation. Thus, the RA did not approve any additional funds for these items of work. However, she determined the Applicant demonstrated the eligibility of costs for ROW clearance, DAC, pole upgrades, secondary line, and cargo trailers because the reasonable cost calculation provided an insufficient comparison for these items. The RA agreed the Applicant’s invoices documented using 2,805 poles to complete the work (an increase of 198), and approved the additional funding.
Lastly, the RA noted that the Applicant must have the legal responsibility for an item of work in accordance with Title 44 Code of Federal Regulations (C.F.R.) § 206.223(a)(3) and denied the costs tied to water, ice, and personal supplies due to insufficient information to substantiate the Applicant’s legal responsibility to provide these items.
In a second appeal dated September 11, 2015, the Applicant disputes the RA’s denial of $953,824.01 in requested PA funding. It restates its previous points about providing water, ice, and personal supplies to employees in the field, appealing $8,499.87 in costs.
The Applicant continues to assert that the $945,324.14 in actual costs for reconductoring denied by the RA were necessary to complete the project, arguing the higher labor and equipment costs were due to the extreme terrain where most of the work was performed. In discussing the decision, the Applicant notes the RA approved $1,073,585.88 in cost increases for six items based on its actual costs. Thus, the Applicant explains the RA granted “virtually all of the ‘adjustments’ it had noted but not used, determined that some of them were appropriately ‘in addition to’ the average cost otherwise used as a cap on funding, and also added funding for the actual (rather than estimated) number of utility poles in the project.”
The Applicant objects to the RA’s denial of costs in excess of the capped average per pole cost set by FEMA. According to the Applicant, Section 406(e) of the Stafford Act allows reimbursement of documented, reasonable, actual (not estimated) costs for eligible work. Moreover, it claims actual costs satisfy the four criteria identified in Office of Management and Budget (OMB) Circular A-122, Cost Principles for Non-Profit Organizations, which should have been considered by FEMA in assessing whether the costs were reasonable when they were first incurred. The Applicant provides further analysis to support its argument that the costs claimed meet OMB criteria, emphasizing that: replacing utility poles was both ordinary and necessary and eligible under the grant; FEMA eventually approved all of its labor and equipment rates as reasonable; it acted prudently in devising a reasonable and effective alternative drilling method that could penetrate the rock when its normal method and standard equipment failed; and it did not deviate from established practices to unjustifiably increase project costs. In its opinion, FEMA’s reasonable cost analysis is inconsistent with OMB criteria, Agency guidance on reasonable costs, and past appeal decisions. More importantly, even if FEMA’s model were more accurate, the Applicant submits it is not “per se unreasonable for a utility to have costs above the average” when higher costs can be explained.
The Applicant further asserts it properly demonstrated the costs claimed, and believes the additional documentation provided through the appeal process explains the scale of the problem caused by rock and why its higher force account costs are reasonable. It asserts that its actual labor and equipment records properly account for when employees worked, and what they did; the duration of equipment used; the locations and total number of utility poles that were installed; and the locations and total number of holes that were required to complete the project.
By letter dated November 2, 2015, the Grantee forwarded the second appeal with its recommendation. The Grantee supports approving the actual costs for the reconductoring work, reiterating that the Applicant has shown them to be both reasonable and compliant with applicable cost principles pursuant to OMB Circular A-122. Because FEMA failed to articulate a logical connection in using its average per pole cost, which did not account for the rock, the Grantee asserts FEMA’s reasonable cost model should not have been applied to deny funding the Applicant’s actual costs as it did not account for the challenges posed by the terrain. However, the Grantee recommends denial of the costs claimed for water, ice and personal supplies.
According to OMB Circular A-122, costs must be reasonable and adequately documented by an applicant. A cost is reasonable if, “in its nature or amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the costs.” FEMA guidance explains that a cost is reasonable when it is both fair and equitable for the type of work being performed and that reasonable costs can be established using historical documentation of similar work and average costs of similar work in the area. Generally, reasonable costs that can be directly tied to the performance of eligible work are eligible for funding. Although the Applicant is responsible for documenting its actual costs for the approved scope of work, FEMA determines whether the costs are reasonable.
On first appeal, the RA determined that although the Applicant had higher costs due to harder soil, even when this difference was taken into account the costs still exceeded those of another Applicant in the area. The RA also noted that the Applicant did not identify an alternative method to demonstrate reasonableness. In consideration of the second appeal, FEMA expanded its review sample to include 36 other PWs that funded reconductoring projects for various utility cooperatives throughout Kansas for this same event, in addition to PWs 1236 and 1240. Based on the average per pole cost of this larger sampling of projects, even though the Applicant’s actual costs are higher than the average for the event overall, FEMA funded 9 PWs with higher per pole averages than what is claimed by the Applicant. The Applicant has established with supporting documentation that it encountered rock the majority of the time when drilling and that drilling through rock impacted all aspects of the project, requiring specialized equipment designed specifically for the rock, and more time for drilling, which resulted in higher than average costs. As is shown in this case, the costs resulting from eligible and properly documented work can fall within a range of costs for similar work and still be considered reasonable.
Based on the documentation submitted and the detailed explanation provided on appeal, the Applicant demonstrated why it made various decisions to address the difficulties caused by the terrain. FEMA finds it persuasive that the Applicant evaluated several alternatives when determining the need to use specialized equipment to complete the work, and that it worked closely with the Grantee when trying to establish suitable equipment rates. Additionally, it chose to use force account labor to complete and manage the project more efficiently, which enabled it to meet the project’s performance deadline. All of the above provide further support that the Applicant acted prudently in executing the complex construction project under difficult circumstances, consistent with applicable cost principles. Therefore, FEMA finds that the Applicant supported the reasonableness of the incurred costs. As such, the Applicant’s actual costs of $945,324.14 for the reconductoring work is eligible for reimbursement.
Legal Responsibility to Provide Water, Ice, and Personal Supplies
Title 44 C.F.R. § 206.223(a)(3) requires work to be the legal responsibility of an eligible applicant in order to be eligible for PA funding. An Applicant must demonstrate legal responsibility by providing documentation for the work claimed. Although the Applicant argues that, as a standard operating procedure, it provides water and ice at its office and that reimbursement of water and ice for employees working in the field is a natural extension of its office policy, it offered no documentation to establish it was legally required to do so. The Applicant also acknowledged its union contract typically required employees to provide their own personal supplies, and that it could not substantiate through documentation, that it was legally obligated to pay for the supplies. As the Applicant has not demonstrated it had legal responsibility to provide water, ice, and personal supplies, the costs are ineligible for reimbursement.
The Applicant demonstrated that it incurred higher costs in order to complete the eligible scope of work on difficult terrain. Furthermore, the Applicant’s higher per pole cost falls within the range allowed by FEMA for similar work in the same disaster. Therefore, $945,324.14 in increased funding is reasonable and eligible for reimbursement. The Applicant did not provide documentation substantiating it was legally responsible to provide employees with water, ice, and personal supplies, and consequently, the $8,499.87 incurred for those costs is ineligible.
 Project Worksheet 1236, Twin Valley Elec. Coop., Inc., Version 1 (Nov. 4, 2011).
 Letter from Dir. of Fin., Twin Valley Elec. Coop., Inc. (July 20, 2011) (reporting average per mile costs of $63,000.00 for single phase and $75,000.00 for three phase).
 Project Worksheet 1236, Twin Valley Elec. Coop., Inc., Version 2 (Aug. 15, 2012).
 FEMA Public Assistance Determination Memorandum, at 4 (Dec. 6, 2013) [hereinafter Determination Memo] (noting that $222.00 was based on an Oklahoma contractor’s quoted price of $37.00 per foot to the standard depth of 6 feet).
 Id.; Project Worksheet 1236, Twin Valley Elec. Coop., Inc., Version 3 (Dec. 18, 2013).
 Determination Memo, at 1. Although FEMA denied $1,085,831.13 for secondary eligibility issues, the overall closeout adjustment was based solely on the amount calculated by FEMA for reasonable costs ($6,280,784.40).
 Letter from Closeout Operation Manager, Recovery Div., FEMA Region VII, to Deputy Dir., Kan. Div. of Emergency Mgmt. (Jan. 9, 2014). Of the Applicant’s closeout request for $8,327,546.36, FEMA approved $6,280,784.40 as eligible. As the previously obligated amount was $7,401,403.00, FEMA’s closeout determination resulted in a deobligation of $1,120,618.60 from PW 1236.
 Letter from CEO & Gen. Manager, Twin Valley Elec. Coop., Inc., & Special Counsel, to Twin Valley Elec. Coop., Inc., Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, through Deputy Dir., Kan. Div. of Emergency Mgmt., to Reg’l Adm’r, FEMA Region VII (Mar. 14, 2014) [hereinafter First Appeal]. The first appeal amount of $2,027,409.89 reflects the difference in what the Applicant claimed at closeout ($8,327,546.36) less $19,352.07 in adjusted costs it did not dispute.
 Letter from CEO & Gen. Manager, Twin Valley Elec. Coop., Inc., & Special Counsel, to Twin Valley Elec. Coop., Inc., Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, through Pub. Assistance Appeals, Kan. Div. of Emergency Mgmt., to Reg’l Adm’r, FEMA Region VII (May 13, 2014) [hereinafter Supplement].
 First Appeal, at 9 (citing USDA Natural Resources Conservation Service, Web Soil Survey National Cooperative Soil Survey, Depth to Any Soil Restrictive Layer—Labette County, Kansas (Typical Cross-Section of Labette County (Mar. 5, 2014) to support that the Applicant encountered a harder subsurface when drilling holes deep enough to install electric poles).
 First Appeal, at 16 (acknowledging that the Public Assistance Guide mentions reasonable costs can be based on historical documentation for similar work and the average cost for similar work in the area, but stated that FEMA did not use either method to support its closeout determination).
 Supplement, at 4 (citing Office of Mgmt. & Budget, Exec. Office of the President, OMB Circular A-122, Cost Principles for Private Non-Profit Organizations (2004) (codified at 2 C.F.R. § 230)).
 First Appeal, at 11-12, 20-21.
 Id. at 9-11 (explaining that equipment included two Caterpillar track loaders with outriggers and special augers attached).
 First Appeal, at 21-33.
 Letter from Deputy Dir., Kan. Div. of Emergency Mgmt., to Reg’l Adm’r, FEMA Region VII (May 16, 2014).
 Letter from Recovery Div. Dir., FEMA Region VII, to Deputy Dir., Kan. Div. of Emergency Mgmt., & CEO & Gen. Manager, Twin Valley Elec. Coop., Inc., at 1 ( Mar. 23, 2015).
 Letter from CEO & Gen. Mgr., Twin Valley Elec. Coop., Inc., & Special Counsel, to Twin Valley Elec. Coop., Inc., Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, to Appeals Analyst, FEMA Region VII, and Deputy Dir., Kan. Div. of Emergency Mgmt. (Apr. 22, 2015) [hereinafter Response to First Appeal RFI].
 FEMA First Appeal Analysis, Twin Valley Elec. Coop., Inc., FEMA-1741-DR-KS (July 7, 2015).
 Letter from CEO & Gen. Manager, Twin Valley Elec. Coop., & Special Counsel, to Twin Valley Elec. Coop., Inc., Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, to Assistant Adm’r, Recovery Directorate, FEMA, at 1 (Sep. 11, 2015) [hereinafter Second Appeal]. The Applicant appeals a total of $953,824.01, which consists of $8,499.87 for water, ice and personal supplies, and the remainder of $945,324.14 in costs denied as unreasonable for reconductoring work.
 Id. at 12-14; OMB Circular A-122, att. A § A(3)(a)-(d).
 Second Appeal, at 13-14.
 Id. at 16 (asserting “Twin Valley has not found a single FEMA Second Appeal Decision challenging the eligibility of force account labor and equipment costs simply because these force account costs are more expensive than some ‘average’…costs incurred by using force account labor do not somehow become unreasonable simply because they are more expensive than average costs incurred in other parts of the state.”).
 Letter from Deputy Dir., Kan. Div. of Emergency Mgmt., to Reg’l Adm’r, FEMA Region VII (Nov. 2, 2015).
 OMB Circular A-122, att. A §§ A(2)(a) and (g).
 OMB Circular A-122, att. A § A(3); Public Assistance Guide, FEMA 322, at 40 (June 2007) [hereinafter PA Guide].
 FEMA completed an analysis of costs of similar work performed by other electric utility cooperatives under FEMA-1741-DR-KS. FEMA reviewed 38 closed large projects for 18 cooperatives (including PWs 1236 and 1240). Here, it is important to note that the scopes of work varied but included enough similar components for FEMA to understand the range of costs per pole for the event, which averaged $2,643.47 per pole (assuming 22 miles per pole). Based on the actual costs claimed on second appeal, the Applicant’s average per pole cost amounts to $2,961.92 for PW 1236. Of the 38 PWs reviewed, 9 PWs yielded higher averages than the Applicant’s ($10,671.22 and $5,788.45, being the highest averages, respectively).
 44 C.F.R. § 206.223(a)(3).
 Second Appeal, at 10 (acknowledging the RA’s request for information to show “Twin Valley had a legal obligation to provide water and tools to its employees…”), 22; First Appeal, at 27-28; Response to First Appeal RFI, at 2-3.
 Second Appeal, at 10, 22; First Appeal, at 32-33; Response to First Appeal RFI, at 3.