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Recently I moved her to another nursing home. A family member thinks she has the right to take over as my incompetent mothers agent. And the nursing home is letting her apply for that???
Can she legally do that?

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What everyone else here has said, PLUS I'd have the nursing home ban that person from visiting until this is straightened out.
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If guardianship has been applied then there will be a hearing. Check newspaper legal notices and call the probate clerk. You have a right. Then inform probate or appear at the court hearing. If you find it is true, you have an option to contact an elder attorney. The court has to approve if you are no longer competent. Your appearance is your trump card.
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If the nursing home doesn’t KNOW that you hold POA, they may very likely be encouraging the other family member based on what they (the nursing home) has been told BY THE OTHER PERSON.

Take your POA and designation letter about her being incompetent to the nursing home ASAP and explain that you have authority over your mother.
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If this is guardianship then you have a problem. You need to make sure you are made aware of any court dates so you can be present. You will show that your Mom, prior to her incompetence, that she assigned you her representative. I hope that if your POA requires a doctor or two saying Mom is no longer able to make informed decisions, you have had that done to put your POA in effect. If not, I would get it done. If your POA is Immediate, its already in effect.
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That person can apply for Guardianship through the courts.
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You need to take your POA to the NH and have it put on file. IMO, no, she can't take over because Mom has already has assigned a POA. If the NH continues to let the family member apply, you may need a letter from a lawyer ( the one who wrote the POA preferably) that your POA is in effect and you are Moms agent.
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