The state's lead economic development agency has been ordered to rescind the selection of H2 Energy LLC to manage an $8.7 million hydrogen technology investment fund.

According a review released yesterday by the state Procurement Office, the contract should have been awarded to the highest-ranking bidder based on committee evaluation. The review makes it likely that another bidder, Kolohala Holdings LLP, ultimately may be awarded the contact.

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

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

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 DBEDT evaluation committee ranked three qualifying bidders for the management contract, with Kolohala 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.

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 used both processes, which did not comply with procurement law, according to the report.

DBEDT's selection was the subject of a four-hour state Senate hearing in early September in which the agency faced questions about how it picked the fund manager. At the time, state Procurement Office Administrator Aaron Fujioka said DBEDT's choice of H2 Energy was not in compliance with state procurement law. Fujioka's final report released yesterday reiterated that preliminary finding.

The report also proposed corrective actions, including rescinding the selection of H2 Energy. DBEDT also should award the contract to the highest-ranking bidder, if it's determined that the evaluation committee did a proper job.

Senate Vice President Donna Kim, D-14th (Halawa, Moana-lua, Kamehameha Heights), said she largely agreed with Fujioka's report, but felt that DBEDT head Liu should face penalties over the matter.

Kim said the Senate Tourism and Government Operations Committee plans to hold a second hearing in October to look into the hydrogen fund contract and other DBEDT procurement decisions.

"I'm satisfied in the sense that (the hydrogen fund contract) is going to go to the people that did score the highest, and that should be the way it's done," she said. "But I certainly think that this whole system was manipulated ... and that there needs to be some investigation into this."

Liu was unavailable for comment yesterday.

Kolohala, which partnered with UH Angels, the Hawaii Natural Energy Institute and others, has lodged an official protest with DBEDT over the decision. That protest is still pending.

H2 Energy has already notified the state that it no longer wanted to manage the fund.

"Kolohala is extremely thankful to the state Procurement Office for rendering a very prompt and careful decision," said Robert Robinson, managing partner for Kolohala Holdings, in a written statement yesterday. "While we have not had time to review the entire document in detail, our initial reaction is one of hope and cautious optimism."

Reach Sean Hao at shao@honoluluadvertiser.com.