State officials violated procurement law with the recent selection of a manager for an $8.7 million hydrogen technology investment fund, according to the state Procurement Office.

The contract was awarded to H2 Energy LLC in early August even though it was the lowest-ranked choice of an evaluation committee that reviewed three qualifying proposals. Procurement office administrator Aaron Fujioka, speaking at a four-hour state Senate committee hearing on the matter yesterday, said the decision to go with H2 Energy was not in compliance with state procurement law.

The contract should have been awarded to the highest-ranking bidder based on the committee's evaluation of criteria in the state's original request for bids, according to a preliminary investigation by Fujioka. Whether the contract should be rebid and whether anyone could face penalties will depend on the findings of a more thorough probe.

"We would like to look at the rest of the information and make a more definitive, purposeful finding," Fujioka told the Senate Tourism and Government Operations Committee.

DISCRETION USED

The hydrogen energy investment fund, created by lawmakers in 2006, is designed to provide financing for companies working to develop clean-burning hydrogen fuel from renewable resources such as wind and water. The state Department of Business, Economic Development and Tourism maintains that it had the discretion to select H2 Energy over top-ranked bidder Kolohala Holdings LLC.

DBEDT Director Ted Liu, who is the agency's procurement officer, said he selected H2 Energy to manage the fund because a DBEDT evaluation committee failed to identify a "hands-down" winning bidder. The agency has asked the state attorney general's office to clarify the law.

"I will take full responsibility should it be found we made mistakes," Liu told lawmakers yesterday.

In addition to the state Procurement Office investigation, DBEDT's selection of H2 Energy is being challenged by a losing bidder, Kolohala Holdings. Kolohala, which is a partnership involving UH Angels and the Hawaii Natural Energy Institute, has lodged an official protest with the agency over the decision.

Meanwhile, DBEDT has halted further efforts to go forward with H2 Energy as the fund's manager, Liu said. H2 Energy is a partnership involving HiBEAM and merchant bank Sennet Capital.

During yesterday's hearing at the state Capitol, DBEDT officials acknowledged not being aware of various procurement laws including one governing how much weight to give a lowest-cost bidder. H2 Energy was the highest-cost bidder, while Kolohala was the lowest-cost bidder, according to rankings produced by an internal review committee.

VIOLATION NOT INTENDED

Senate Vice President Donna Kim, D-14th (Halawa, Moanalua, Kamehameha Heights), said she didn't think DBEDT officials intentionally violated the law. However, she said she would like to see mandatory procurement law training for state agency directors and other procurement staff.

"I'm hoping ... that whoever's involved understands and is trained in the rules and regulations," she said.

Reach Sean Hao at shao@honoluluadvertiser.com.