STATE PROCUREMENT OFFICE

PROCUREMENT VIOLATION:
REPORT OF FINDINGS AND CORRECTIVE ACTIONS AND/OR
REQUEST FOR AFTER-THE-FACT PAYMENT APPROVAL

I TO: Chief Procurement Officer

Chief Financial Officer
2 FROM: MARK E. RECKTENWALD, Director DCCA
Department/Div is ion/Agency

SUBJECT: Procurement Violation Pursuant to § 3-131-6, HAR

3. PART I— REPORT OF FINDINGS AND CORRECTIVE ACTIONS for a procurement violation

Attached is the report of findings and corrective actions. It includes the following, at a minimum:
(I) The facts and circumstances leading to the need for the good or services, including the explanation as to why
established procedures were not followed.
(2) Whether there are any indications of intent to deliberately evade established purchasing procedures;
(3) Any lack of procurement information or training;
(4) Whether this is the first occurrence; and
(5) Whether appropriate written assurance and safeguards have been established to preclude a subsequent unauthorized
procurement.

4. Direct questions to: Clyde S. Sonobe, CATV Phone: 586 2620

-

s I certify that the information provided above is to the best of my knowledge, true and correct.

Department Head
Reserved for SPO Use Only
6 Chief Procurement Officer's comments:

A PPROVED DISAPPROVED
Chief Procurement Officer Date

8. PART H REQUEST FOR AFTER-THE-FACT PAYMENT APPROVAL, if applicable

—

eque s t is hereby made for payment to the vendor because:

Reserved for DAGS, Comptroller Use Only

1 9 Chief Financial Officer's comments:

0 APPROVED DISAPPROVED
Chief ancial Officer Date

11. P.V.

S PO- 16 (Rel, .1193012005)

 SPO Form-16

PART I — REPORT OF FINDINGS AND CORRECTIVE ACTIONS for a

procurement violation

(1 ) The facts and circumstances leading to the need for the good or service,
including the explanation as to why established procedures were not
followed:

Federal law (47 U.S.C. § 531) allows the State of Hawaii ("State"), the
franchising authority, to establish requirements in a cable television franchise
with respect to the designation or use of channel capacity for public, educational,
and government ("PEG") use. The State, through the Department of Commerce
and Consumer Affairs ("DCCA"), requires cable operators to designate PEG
access channels through the franchise orders issued pursuant to HRS chapter
440G. In these franchise orders, DCCA recognized the benefit that PEG access
provides the public and required cable operators (as one of the conditions to
obtain cable television franchises in the State) to provide channels for PEG use
and to pay annual PEG access fees for operations, facilities and equipment.

DCCA entered into separate contracts with the four (4) PEG access
organizations to (among other things) manage and operate the PEG channels,
train the public to use the PEG facilities and equipment to create programs, and
cablecast the programs created and submitted by the public on the cable
operator's channels. These access organizations are: Olelo Community
Television ("Olelo") on Oahu, Na Leo 0' Hawaii ("Na Leo") on Hawaii, Hoike:
Kauai Community Television ("Hoike") on Kauai, and Akaku: Maui Community
Television ("Akaku") on Maui. DCCA does not consider these organizations to
be State or government agencies because they are private, non-profit
corporations that are run independent of government, and they have filed articles
of incorporation and registered with the State's Business Registration Division.

The PEG access organizations are funded primarily from the annual PEG access
fees that the local cable operator (currently Time Warner) is required to pay
pursuant to DCCA's franchise orders. The cable operator pays these annual
PEG access fees directly to the PEG access organizations, and is allowed to
pass these fees on to cable television subscribers under federal law. The cable
operator has elected to pass these fees to subscribers and assesses subscribers
on a monthly basis. The PEG access organizations do not receive any
governmental monies either from the State's general fund or DCCA's
Compliance Resolution Fund.

DCCA entered into initial PEG access contracts with Olelo in 1990 and Hoike in
1993. HRS chapter 103D was not in effect when these contracts were initially
entered into. 1 DCCA subsequently entered into initial contracts with Na Leo in

HRS chapter 103D became effective an July 1, 1994.

 1996 and with Akaku in 1998. At that time, DCCA was not aware that these PEG
access contracts were subject to the State's Procurement Code.

DCCA then entered into new contracts with all four PEG access organizations in
1998-1999 to require more specific reporting requirements and accountability,
but maintain the level and types of access services already being provided to the
public. 2 As in the past, DCCA was not aware that these PEG access contracts
were subject to the State's Procurement Code. The Attorney General's office
reviewed and approved the contracts as to form.

Up until 2004, the PEG access contracts were automatically renewed each year.
After December 2003, DCCA began re-negotiating these contracts and has been
extending them by Supplemental Agreements. While reviewing the PEG access
contracts, the DCCA asked the Department of the Attorney General and the
State's Procurement Office ("SPO") whether DCCA's contracts with these PEG
access organizations are subject to the State Procurement Code. After much
discussion, DCCA was informed that these PEG access contracts are subject to
the State Procurement Code and that none of the exemptions in HRS § 103D-
102(b) appear to apply; however, the exemption in HRS § 103D-102(b)(4)(L)
allows the chief procurement officer to determine that a good or service is
exempt from the Procurement Code even though such good or service is
available from multiple sources because procurement by competitive means is
either not practicable or not advantageous to the State.

DCCA plans to conduct public meetings to obtain the public's input and
comments on PEG access and PEG services in the State. These public
meetings will be held in each county and will provide the DCCA with input on
whether to proceed with the REP process or to seek an exemption from the SPO.
There are a number of complex issues that must be addressed if the State issues
an RFP (e.g., whether the RFP should address issues related to operational
practices and policies; transition of resources, staff, facilities and equipment from
existing PEG s to new organization(s); and maintaining the level of access
services with minimal disruption during the transition). DCCA anticipates that the
public comment process and DCCA's evaluation of the issues relating to an REP
will take no more than (7) months (i.e., to approximately June 30, 2006).

To ensure that PEG access services continue to be provided without interruption

to the public and provide DCCA with adequate time to conduct the public
comment meetings, DCCA entered into Supplemental Agreements with all four
PEG access organizations and extended the current contracts to June 30, 2006.

2
The current contract with Olelo was entered into on December 24, 1998; the current contract with
Akaku was entered into on June 17, 1999; the current contract with Na Leo was entered into on June 17 :
1998 and the current contract with Hoike was entered into on August 25, 1999.

2
(2) Whether there are any indications of intent to deliberately evade
established purchasing procedures:

Until recently,-DCCA was not aware that the PEG access contracts were subject
to the State's Procurement Code. Since the first contracts with Olelo and Hoike
predated the adoption of the Code, the Department had established a practice of
handling these contracts through direct negotiations with each PEG rather than
through competitive bidding. Furthermore, these contracts differ in some
significant ways from typical government contracts. Most notably, the funds that
are being expended are not disbursed by the government, but rather are paid
directly to each PEG by a private party (currently, Time Warner). Moreover, the
Attorney General's office reviewed and approved the 1998-1999 contracts as to
form. Thus, any failure to comply with the requirements of HRS chapter 103D
was inadvertent and purely unintentional.

DCCA notes that these contracts do not involve the payment of monies from the
State's general fund and there is no request to approve an after-the-fact
disbursal of general funds.

(3) Any lack of procurement information or training:

The SPO has met with DCCA staff to go over the Procurement Code
requirements with respect to the PEG access contracts. DCCA welcomes
additional training on HRS chapter 103D.

(4) Whether this is the first occurrence:

To the best of our knowledge, this appears to be the first occurrence of this type
for DCCA.

(5) Whether appropriate written assurance and safeguards have been

established to preclude a subsequent unauthorized procurement:

Yes. Now that DCCA is aware that these PEG access contracts are subject to
the Procurement Code, the Director has provided written direction to the Cable
Television Division that contracts for PEG-type services should be subject to
competitive bidding pursuant to HRS §1030, unless exempted.