The state's top economic development agency is facing questions about how it picked a manager for a new $8.7 million hydrogen energy investment fund.

In early August, the Department of Business, Economic Development and Tourism selected H2 Energy to run the program. However, the partnership involving HiBEAM and merchant bank Sennet Capital was the lowest-ranking choice of an evaluation committee that reviewed three qualifying proposals.

The decision to go with H2 Energy will be reviewed by the State Procurement Office and is expected to be the focus of a legislative hearing next week.

"Yes, this has been brought to our attention; we are in the process of reviewing this matter," wrote procurement office administrator Aaron Fujioka in an e-mail to The Advertiser yesterday.

The hydrogen energy investment fund, created by lawmakers in 2006, will help finance companies working to develop clean-burning hydrogen fuel from renewable resources such as wind and water.

Hydrogen is a renewable fuel that can be used in fuel cells, internal combustion engines and in future power plants. Hydrogen is plentiful, but researchers have yet to find cost-effective ways to manufacture and use the fuel.

State procurement law states that contracts should be awarded to a proposal judged as "the best value" to the state based on the evaluation of a select committee or an agency procurement officer. In selecting H2 Energy, DBEDT appears to have used both processes.

DBEDT Director Ted Liu, who is the agency's chief procurement officer, said he selected H2 Energy to manage the fund because a DBEDT evaluation committee failed to identify a "hands-down" winning bidder.

"There are instances, quite a few of them, in which a committee's recommendation is very strong and clear, and I have rarely gone, I believe, against those types of recommendations," Liu said yesterday. "That wasn't the case here.

"My understanding and the way that I've been advised is that these decisions are chief procurement officer's decisions. And I am he."

In a July 31 letter, the DBEDT evaluation committee ranked three qualifying bidders for the management contract with Kolohala Holdings LLP placing first, followed by Enterprise Honolulu second and H2 Energy third. The ranking was based on a numerical system laid out in the agency's request for proposals. The three-person committee gave Kolohala 255 points, followed by Enterprise Honolulu with 243 points and H2 Energy 234.5 points.

The committee members did not recommend a contract winner, Liu said.

"At the meeting, which was my one and only extensive contact with the process, the committee had no recommendation," he said. "It was understandable to me why they didn't have a recommendation. Each one of the consortia had strengths and weaknesses, some of which emerged over the whole interaction with each of the proposers, which was the intention of the process."

H2 Energy was the highest-cost bidder, according to rankings produced by the evaluation committee. Liu said rather than focus on cost, his selection was based on the ability of bidders to deliver on promises made in their proposals.

"My decision came down to a series of factors, which was who was going to be in the best position to deliver on all these promises," Liu said. "That's the ultimate value to the state."

The selection of H2 Energy to manage the hydrogen fund will be a focus of a legislative hearing about transparency of government procurement decisions, according to Senate Vice President Donna Kim, D-14th (Halawa, Moanalua, Kamehameha Heights). The Senate Tourism and Government Operations Committee could review the issue as early as Tuesday.

Typically, winners of state contracts of significant size are chosen by committee to relieve the state of liability that could be created by having one person subjectively pick a winning bidder, according to the state Procurement Office.

While details of H2 Energy's contract have not been settled, the company could receive up to $385,000 in consulting fees, along with 2.75 percent of the fund's value and a share of fund profits.

The personnel behind H2 Energy include Barry Weinman, managing director of Allegis Capital and a co-founder of HiBEAM, and Richard Lim and Kenton Eldridge, who are officers in Sennet Capital.

H2 Energy competitor Kolohala is a partnership involving UH Angels and the Hawaii Natural Energy Institute. Enterprise Honolulu partnered with fund manager Ventana Capital in its proposal.

Liu did not expect scrutiny over his selection of H2 Energy to delay implementation of the hydrogen fund program.

"It's a good decision and we are moving forward with implementing it," he said. "On all these things you can disagree with my judgment. But the process was strong."

Reach Sean Hao at shao@honoluluadvertiser.com.