I think a fangame is more of a game designed and created fully form a fan. I think a ROM hack would fit more under the category of a fan-designed modification to a game.

I'm pretty sure judging isn't just based just on how a game plays. You have to think about the artwork, the level design, the work put into a game. (EDIT: Also, I'd like to mention how his engine is open-sourced. He's offering a great tool to the fangame community.)

ROM hacks are an entirely different thing than writing a game from scratch. I'm not trying to downplay your work, I think it's great what you've done; but you have to realize what it looks like when you're comparing a rom hack with a few custom levels and classes compared to a fangame created from scratch. I agree with the judges and think a custom built web game is a lot more impressive than a ROM hack. Calling the game incredibly incomplete is in my opinion a travesty, and comparing his custom engine to your ROM hack running on an engine built by Nintendo would be hard for any judge.

Finally, remember that this isn't supposed to be a competition. This is a fangame CONVENTION. The awards are just an icing on the cake; something to spotlight something that the convention heads think is special. You may not agree with them, but respect their decisions, and remember it really doesn't mean much in the long run.