The test fuel specifications apply to all testing. However, we may
be able to allow for testing with oxygenated fuel for production-line
testing if manufacturers first establish the appropriate correction to
account for the fuel's effect on emissions. We request comment on an
appropriate approach that would allow for production-line testing with
oxygenated fuel.
    We are similarly proposing test fuel specifications for liquefied
petroleum gas (LPG) and natural gas. Since natural gas has a very high
methane content and methane is generally nonreactive in the atmosphere,
we are proposing to apply the same emission standards for natural gas
engines but not count methane emissions toward the total hydrocarbon
measurement.

E. Certification and Compliance Provisions for Small SI Engines and
Equipment

(1) Deterioration Factors
    As part of the certification process, manufacturers generate
deterioration factors to demonstrate that their engines meet emission
standards over the full useful life. We are proposing some changes from
the procedures currently included in part 90 (see Sec.  1054.240 and
Sec.  1054.245). Much of the basis for these changes comes from the
experience gained in testing many different engines in preparation for
this proposal. First, we are proposing to discontinue bench aging of
emission components. Testing has shown that operating and testing the
complete engine is necessary to get accurate deterioration factors.
Second, we are proposing to allow for assigned deterioration factors
for a limited number of small-volume nonhandheld engine families.
Manufacturers could use assigned deterioration factors for multiple
small-volume nonhandheld engine families as long as the total
production for all of the nonhandheld engine families for which the
manufacturer is using assigned deterioration factors is estimated at
the time of certification to be no more than 10,000 units per year.
Third, we are proposing to allow for assigned deterioration factors for
all engines produced by small-volume nonhandheld engine manufacturers.
    For the HC+NOX standard, we propose to specify that
manufacturers use a single deterioration factor for the sum of HC and
NOX emissions. However, if manufacturers get approval to
establish a deterioration factor on an engine that is tested with
service accumulation representing less than the full useful life for
any reason, we would require separate deterioration factors for

HC and NOX emissions. The advantage of a combined
deterioration factor is that it can account for an improvement in
emission levels with aging. However, for engines that have service
accumulation representing less than the full useful life, we believe it
is not appropriate to extrapolate measured values indicating that
emission levels for a particular pollutant will decrease. This is the
same approach we adopted for recreational vehicles.
    EPA is not proposing the values for the assigned deterioration
factors for small-volume nonhandheld engine manufacturers in this
proposal. In an effort to develop deterioration factors that are
appropriate for Small SI engines, we plan to evaluate certification
data from Phase 3 engines certified early with EPA and from engines
certified under California ARB's Tier 3 standards (which begin in 2007
and 2008). Because we are not proposing new exhaust standards for
handheld engines, the assigned deterioration factor provisions adopted
for Phase 2 handheld engines are being retained.
    Although we are not proposing new exhaust standards for handheld
engines, handheld engine manufacturers noted that California ARB has
approved certain durability cycles for accumulating hours on engines
for the purpose of demonstrating emissions durability. The durability
cycles approved by California ARB vary from a 30-second cycle for
chainsaws to a 20-minute cycle for blowers, with 85 percent of the time
operated at wide open throttle and 15 percent of the time operated at
idle. Engine manufacturers can run the durability cycles over and over
until they accumulate the hours of operation equivalent to the useful
life of the engine family. Our current regulations state that ``service
accumulation is to be performed in a manner using good judgment to
ensure that emissions are representative of production engines.'' While
we are not proposing to change the regulatory language regarding
service accumulation, we believe the California ARB-approved durability
cycles are appropriate and acceptable to EPA for accumulating hours on
handheld engines for demonstrating emissions durability.
    Manufacturers have pointed out that they are developing a testing
protocol that would allow manufacturers to develop deterioration
factors for catalysts through a bench-aging procedure. A fundamental
factor in evaluating the appropriateness of any bench-aging procedure
is the extent to which it simulates representative exhaust gas
composition and other in-use operating parameters. We request comment
on any appropriate procedures, or limitations on the use of such
procedures, for certifying Small SI engines.
(2) Delegated Final Assembly
    The current practice of attaching exhaust systems to engines
varies. Class I engines are typically designed and produced by the
engine manufacturer with complete emission control systems. Equipment
manufacturers generally buy these engines and install them in their
equipment, adjusting equipment designs if necessary to accommodate the
mufflers and the rest of the exhaust system from the engine
manufacturer.
    Engine manufacturers generally produce Class II engines without
exhaust systems, relying instead on installation instructions to ensure
that equipment manufacturers get mufflers that fall within a specified
range of backpressures that is appropriate for a given engine model.
Equipment manufacturers are free to work with muffler manufacturers to
design mufflers that fit into the space available for a given equipment
model, paying attention to the need to stay within the design
specifications from the engine manufacturers. A similar situation
applies for air filters, where equipment manufacturers in some cases
work with component manufacturers to use air filters that are tailored
to the individual equipment model while staying within the design
specifications defined by the engine manufacturer.
    The existing regulations require that certified engines be in their
certified configuration when they are introduced into commerce. We
therefore need special provisions to address the possibility that
engines will need to be produced and shipped without exhaust systems or
air intake systems that are part of the certified configuration. We
have adopted such provisions for heavy-duty highway engines and for
other nonroad engines in 40 CFR 85.1713 and 40 CFR 1068.260,
respectively. These provisions generally require that engine
manufacturers establish a contractual arrangement with equipment
manufacturers and take additional steps to ensure that engines are in
their certified configuration before reaching the ultimate purchaser.
    We are proposing to apply delegated-assembly provisions for
nonhandheld engines that are similar to those adopted for heavy-duty
highway engines, with a variety of adjustments to address the unique
situation for Small SI engines (see Sec.  1054.610). This would require
that engine manufacturers apply for certification in the normal way,
identifying all the engine parts that make up the engine configurations
covered by the certification. Equipment manufacturers would be able to
work with muffler manufacturers to get mufflers with installed
catalysts as specified in the engine manufacturer's application for
certification. If equipment manufacturers would need a muffler or
catalyst that is not covered by the engine manufacturer's
certification, the engine manufacturer would need to amend the
application for certification. This may require new testing if the data
from the original emission-data engine are not appropriate for showing
that the new configuration will meet emission standards, as described
in Sec.  1054.225. (Alternatively, the equipment manufacturer may take
on the responsibility for certifying the new configuration, as
described in Sec.  1054.612.) Engine manufacturers would also identify
in the application for certification their plans to sell engines
without emission-related components. We are proposing several
provisions to ensure that engines will eventually be in their certified
configuration. For example, engine manufacturers would establish
contracts with affected equipment manufacturers, include installation
instructions to make clear how engine assembly should be completed,
keep records of the number of engines produced under these provisions,
and obtain annual affidavits from affected equipment manufacturers to
confirm that they are installing the proper emission-related components
on the engines and that they have ordered a number of components that
corresponds to the number of engines involved.
    While the delegated-assembly provisions are designed for direct
shipment of engines from engine manufacturers to equipment
manufacturers, we are aware that distributors play an important role in
providing engines to large numbers of equipment manufacturers. We are
proposing that these provisions apply to distributors in one of two
ways. First, engine manufacturers may have an especially close working
relationship with primary distributors. In such a case, the engine
manufacturer would be able to establish a contractual arrangement
allowing the distributor to act as the engine manufacturer's agent for
all matters related to compliance with the delegated-assembly
provisions. This would allow the distributor to make arrangements with
equipment manufacturers to address design needs

and perform oversight functions. We would hold the engine manufacturer
directly responsible if the distributor failed to meet the regulatory
obligations that would otherwise apply to the engine manufacturer.
Second, other distributors may receive shipment of engines without
exhaust systems, but they would need to add any aftertreatment
components before sending the engines on to equipment manufacturers.
Engine manufacturers would treat these distributors as equipment
manufacturers for the purposes of delegated assembly. Equipment
manufacturers buying engines from such a distributor would not have the
option of separately obtaining mufflers from muffler manufacturers. In
both of these scenarios, the engine manufacturer continues to be
responsible for the in-use compliance of all their engines.
    Engine manufacturers would need to affix a label to the engine to
clarify that it needs certain emission-related components before it is
in its certified configuration. This labeling information is important
for alerting assembly personnel to select mufflers with installed
catalysts; the label would also give in-house inspectors or others with
responsibility for quality control a tool for confirming that all
engines have been properly assembled and installed. Given the large
numbers of engine and equipment models and the interchangeability of
mufflers with and without catalysts, we believe proper labeling will
reduce the possibility that engines will be misbuilt.
    This labeling may be done with any of three approaches. First, a
temporary label may be applied such that it would not be removed
without a deliberate action on the part of the equipment manufacturer.
We believe it is not difficult to create a label that will stay on the
engine until it is deliberately removed. Second, manufacturers may add
the words ``delegated assembly'' to the engine's permanent emission
control information label. Third, manufacturers may create a unique
alphanumeric code to apply to the engine's permanent emission control
information label. This code would be identified in the application for
certification. Creating a unique code would not provide a clear enough
communication to equipment manufacturers that they are responsible for
bringing the engine into its certified configuration. Engine
manufacturers taking this approach would therefore need to add features
to the label to make this clear. For example, creating labels with a
different color or shading would make it easy to identify that an
engine needs to be properly assembled before it is in its certified
configuration.
    Any of these labeling approaches would properly identify the
engines as needing emission-related components from the equipment
manufacturer. We have a remaining concern that the approaches involving
permanent labels do not identify that an engine is not yet in its
certified configuration. Since there is no change in the label to show
the engine's status, we believe these approaches may not be as
effective as the temporary labels in preventing misbuilt engines. We
are also concerned that imported engines with manufacturer-specific
codes will lead to confusion with Customs inspectors. With no
standardized approach for identifying which engines do not need
catalysts, there is a significant risk that engines will be held up
while inspectors confirm their status. We request comment on the best
way of requiring labeling information for these engines. For example,
we request comment on adding a requirement for equipment manufacturers
to add some identifying mark to the permanent label to show that the
engine is in its certified configuration. We also request comment on
replacing the provision allowing for a manufacturer-specific code to
some standardized abbreviation for ``delegated assembly'' that would
allow for unambiguous identification of the engine's status with a
minimum burden in terms of requiring larger labels.
    In addition, engine manufacturers would need to perform or arrange
for audits to verify that equipment manufacturers are properly
assembling engines. Engine manufacturers may rely on third-party agents
to perform auditing functions. Since the purpose of the audit is to
verify that equipment manufacturers are properly assembling products,
they may not perform audits on behalf of engine manufacturers. We are
proposing to require that audits must involve at a minimum reviewing
the equipment manufacturer's production records and procedures,
inspecting the equipment manufacturer's production operations, or
inspecting the final assembled products. Inspection of final assembled
products may occur at any point in the product distribution system. For
example, products may be inspected at the equipment manufacturer's
assembly or storage facilities, at regional distribution centers, or at
retail locations. The audit must also include confirmation that the
number of aftertreatment devices shipped was sufficient for the number
of engines involved. We would typically expect engine manufacturers to
perform more than the minimum auditing steps identified above. For
example, equipment manufacturers with low order volumes, an unclear
history of compliance, or other characteristics that would cause some
concern may prompt us to require a more extensive audit to ensure
effective oversight in confirming that engines are always built
properly. Moreover, in the early years of this program, engine
manufacturers should consider nearly all participating equipment
manufacturers to be unfamiliar with the regulatory requirements and the
mechanics of meeting their responsibilities and obligations as
contracted manufacturers of certified engines. Engine manufacturers
would describe in the application for certification their plan for
taking steps to ensure that all engines will be in their certified
configuration when installed by the equipment manufacturer. EPA
approval of a manufacturer's plan for delegated assembly would be
handled as part of the overall certification process. We request
comment on appropriate requirements related to specific auditing
procedures that would be appropriate to address these concerns and to
provide adequate assurance that engines are routinely assembled in
their certified configuration.
    We are proposing that engine manufacturers annually audit twelve
equipment manufacturers, or fewer if they are able to audit all
participating equipment manufacturers on average once every four years.
These audits would be divided over different equipment manufacturers
based on the number of engines sold to each equipment manufacturer. We
further propose that these auditing rates may be reduced after the
first eight years, or after the engine manufacturer has audited all
affected equipment manufacturers. This reduced auditing rate would be
based on an expectation that all participating equipment manufacturers
would be audited on average once every ten years.
    To facilitate auditing related to catalysts, we are proposing to
require engine manufacturers to establish an alphanumeric designation
to identify each unique catalyst design (including size, washcoat,
precious metal loading, supplier, and any other appropriate factors)
and instruct equipment manufacturers to use stamping or other means to
permanently display this designation on the external surface of the
exhaust system, making it readily visible as much as possible when the
equipment is fully assembled, consistent with the objective of
verifying the identity of the installed

catalyst. This designation could be the same as the code applied to the
emission control information label as described above.
    We are proposing that all the same requirements apply for separate
shipment related to air filters if they are part of an engine's
certified configuration, except for the auditing. We would require
auditing related to air filters only if engine manufacturers are
already performing audits related to catalysts. We believe there is
much less incentive or potential for problems with equipment
manufacturers producing engines with noncompliant air filters so we
believe a separate auditing requirement for air filters would be
unnecessary.
    The draft regulation specifies that the exemption expires when the
equipment manufacturer takes possession of the engine and the engine
reaches the point of final equipment assembly. We would understand the
point of final equipment assembly for purposes of delegated assembly
for aftertreatment components to be the point at which the equipment
manufacturer attaches a muffler to the engine. Engines observed in
production or inventory assembled with improper mufflers would be
considered to have been built contrary to the engine manufacturer's
installation instructions. Catalysts are invariably designed as part of
the muffler, so we would understand that there would be no reason to
install a different muffler once a given muffler has been installed
using normal production procedures. If equipment manufacturers sell
equipment without following these instructions, they would be
considered in violation of the prohibited acts (i.e., selling
uncertified engines). If there is a problem with any given equipment
manufacturer, we would hold the engine manufacturer responsible for
those noncompliant engines and require the engine manufacturer to
discontinue the practice of delegated assembly for that equipment
manufacturer. We request comment on the need to more explicitly
identify the meaning of the point of final equipment assembly in the
regulations, as described above.
    We are aware that the proposed approach of allowing equipment
manufacturers to make their own arrangements to order mufflers results
in a situation in which the equipment manufacturer must spend time and
money to fulfill their responsibilities under the regulations. This
introduces a financial incentive to install mufflers with inferior
catalysts, or to omit the catalyst altogether. To address this concern
for heavy-duty highway engines, we adopted a requirement for engine
manufacturers to confirm that a vehicle manufacturer has ordered the
appropriate aftertreatment devices before they ship an engine.
Equipment manufacturers' purchasing practices for Small SI engines,
especially considering the order volumes, makes this approach
impractical. We are instead proposing to require that engine
manufacturers get written confirmation from each equipment manufacturer
before an initial shipment of engines in a given model year for a given
engine model. This confirmation would document the equipment
manufacturer's understanding that they are using the appropriate
aftertreatment components. The written confirmation would be due within
30 days after shipping the engines and would be required before
shipping any additional engines from that engine family to that
equipment manufacturer.
    The shipping confirmation included in the rule for heavy-duty
highway engines is a very substantial provision to address the fact
that vehicle manufacturers would gain a competitive advantage by
producing noncompliant products, and that engines in commerce would be
labeled as if they were fully compliant even though they are not yet in
their certified configuration. This is especially problematic when a
muffler with no catalyst can easily be installed and can perform
without indicating a problem. To address this concern for Small SI
engines, we are including a requirement that equipment manufacturers
include in their annual affidavits an accounting for the number of
aftertreatment components they have ordered relative to the number of
engines shipped without the catalysts that the mufflers would otherwise
require.
    Production-line testing normally involves building production
engines using normal assembly procedures. For engines shipped without
catalysts under the delegated-assembly provisions, it is not normally
possible to do this at the engine manufacturer's facility, where such
testing would normally occur. To address this, we are proposing to
specify that engine manufacturers must arrange to get a randomly
selected catalyst that will be used with the engine. The catalyst may
come from any point in the normal distribution from the aftertreatment
component manufacturer to the equipment manufacturer. The catalyst may
not come from the engine manufacturer's own inventory. Engine
manufacturers would keep records to show how they randomly selected
catalysts.
    As described above, we believe this is a very significant
compliance issue since it allows manufacturers to introduce into
commerce engines that are labeled as meeting current emission standards
even though they are not in their certified configuration. This is
especially true for Small SI engines where many high-volume products
are handled by many different manufacturers such that the final
assembly requires equipment manufacturers to properly install otherwise
indistinguishable products to keep products in the certified
configuration. Also, an equipment manufacturer may install multiple
engine models in a single type of equipment, some of which may need
catalyzed mufflers while others would use a conventional muffler. The
appearance and function of such mufflers with and without catalysts
would be virtually indistinguishable, which increases the likelihood of
accidentally installing the wrong muffler.
    The provisions described above are intended to minimize the risks
associated with this practice. However, this concern is heightened for
companies that would use the delegated-assembly provisions to import
noncompliant engines with the expectation that equipment manufacturers
in the United States would add catalyzed mufflers as specified in the
engine manufacturer's application for certification. This raises two
potential problems. First, this practice could create a loophole in
EPA's enforcement program that would allow for widespread importation
of noncompliant engines, with the financial incentive for equipment
manufacturers to complete assembly with noncompliant mufflers. Since
all engines have mufflers, and since proper catalyst installation
generally can be confirmed only with an emission test or a destructive
inspection, it would be very difficult to find and correct any problems
that might occur. Second, engine manufacturers outside the United
States may be willing to take risks with noncompliant products based on
their limited exposure to EPA enforcement. As described in Section VI.F
we are considering bonding requirements for imported engines to ensure
that we will be able to fully resolve compliance or enforcement issues
with companies that have little or no presence or selling history in
the United States. We would expect to specify an increased bond payment
for importation of engines using the delegated-assembly provisions.
Increasing the per-engine bond value by 20 percent corresponds roughly
with the

value of catalyzed mufflers that would be required. We believe this
would be an appropriate additional bond value to address the concerns
for noncompliance from imported engines.
    While this section describes the compliance provisions we believe
are necessary for addressing the practice of delegating assembly of
emission-related components to equipment manufacturers, providing a
broader view of the context for delegated assembly is also appropriate
for understanding our concern regarding the duplicative aspects of
delegated assembly with other provisions in this rulemaking. Recent
evaluation of a wide range of equipment models powered by Small SI
engines has led to several important observations. Many equipment
models have mufflers installed away from all other components such that
they have no space or packaging constraints. Other equipment models
with mufflers that are installed inside a cage or compartment generally
include substantial space around the muffler, which is necessary to
isolate the muffler's high surface temperatures and radiant heat from
operators and any heat-sensitive components. Another important
observation was the striking uniformity of muffler geometries, even
where equipment manufacturers obtained mufflers directly from muffler
manufacturers. Most mufflers on Class II engines are cylindrical models
with the size varying to correspond with the size of the engines. Other
Class II engine models use a box-shaped muffler design, but these
mufflers also exhibited little variation across models. These
observations have fundamental implications for the regulatory
provisions we are proposing for ensuring a smooth transition to the
Phase 3 emission standards.
    For example, in situations that limit equipment manufacturers to
standardized muffler configurations, they would at most need to make
modest changes to their equipment to accommodate somewhat different
muffler geometries. We have taken these equipment design changes into
account with the Transition Program for Equipment Manufacturers
described below. We are therefore concerned that the proposed
provisions for delegated assembly and the Transition Program for
Equipment Manufacturers may be duplicative in providing additional time
and/or flexibilities for equipment manufacturers to redesign their
equipment for accommodating engines that meet the Phase 3 standards. If
this is the case, the proposed provisions for delegated assembly merely
serve to preserve the current business arrangements for the different
types of manufacturers. We request comment on the need for these
delegated-assembly provisions in light of the Transition Program for
Equipment Manufacturers. We also request comment on the appropriateness
of adopting these delegated-assembly provisions for Class I engines
since these engine manufacturers already install complete exhaust
systems for the large majority of their engines. Finally, we request
comment on the need to allow for the use of the more restrictive
delegated-assembly provisions in Sec.  1068.260 in the event that we do
not finalize the delegated-assembly provisions described above.
(3) Transition Program for Equipment Manufacturers
    Given the level of the proposed Phase 3 exhaust emission standards
for Class II engines, we believe there may be situations where the use
of a catalyzed muffler could require equipment manufacturers to modify
their equipment. We are therefore proposing a set of provisions to
provide equipment manufacturers with reasonable lead time for
transition to the proposed standards. The proposed provisions are
similar to the program we adopted for nonroad diesel engines (69 FR
38958, June 29, 2004).
    Equipment manufacturers would not be obligated to use any of these
provisions, but all equipment manufacturers that produce Class II
equipment would be eligible to do so. We are also proposing that all
entities under the control of a common entity would have to be
considered together for the purposes of applying these allowances.
Manufacturers would be eligible for the allowances described below only
if they have primary responsibility for designing and manufacturing
equipment, and if their manufacturing procedures include installing
engines in the equipment.
(a) General Provisions
    Under the proposed approach, beginning in the 2011 model year and
lasting through the 2014 model year, each equipment manufacturer may
install Class II engines not certified to the proposed Phase 3 emission
standards in a limited number of equipment applications produced for
the U.S. market (see Sec.  1054.625). We refer to these here as ``flex
engines.'' These flex engines would need to meet the Phase 2 standards.
The maximum number of ``allowances'' each manufacturer could use would
be based on 30 percent of an average year's production of Class II
equipment. The number of ``allowances'' would be calculated by
determining the average annual U.S.-directed production of equipment
using Class II engines produced from January 1, 2007 through December
31, 2009. Thirty percent of this average annual production level would
be the total number of ``allowances'' under this transition program
over four years. Manufacturers could use these allowances for their
Class II equipment over four model years from 2011 through 2014, with
the usage spread over these model years as determined by the equipment
manufacturer. Equipment produced under these provisions could use
engines that meet the Phase 2 emission standards instead of the Phase 3
standards. If an equipment manufacturer newly enters the Class II
equipment market during 2007, 2008 or 2009, the manufacturer would
calculate its average annual production level based only on the years
during which it actually produced Class II equipment. Equipment
manufacturers newly entering the Class II equipment market after 2009
would not receive any allowances under the transition program and would
need to incorporate Phase 3 compliant engines into the Class II
equipment beginning in 2011.
    Equipment using engines built before the effective date of the
proposed Phase 3 standards would not count toward an equipment
manufacturer's allowances. Equipment using engines that are exempted
from the Phase 3 standards for any reason would also not count toward
an equipment manufacturer's allowances. For example, we are proposing
that small-volume engine manufacturers may continue to produce Phase 2
engines for two model years after the Phase 3 standards apply. All
engines subject to the Phase 3 standards, including those engines that
are certified to FELs at higher levels than the standard, but for which
an engine manufacturer uses exhaust ABT credits to demonstrate
compliance, would count as Phase 3 complying engines and would not be
included in an equipment manufacturer's count of allowances.
    The choice of the allowances based on 30 percent of one year's
production is based on our best estimate of the degree of reasonable
lead time needed by the largest equipment manufacturers to modify their
equipment designs as needed to accommodate engines and exhaust systems
that have changed as a result of more stringent emission standards. We
believe the proposed level of allowances responds to the need for lead
time to accommodate the workload related to redesigning

equipment models to incorporate catalyzed mufflers while ensuring a
significant level of emission reductions in the early years of the
proposed program.
    Equipment manufacturers may face similar challenges in
transitioning to rotational-molded fuel tanks that meet the proposed
permeation standards. We are therefore proposing to allow equipment
manufacturers to use noncompliant rotational-molded fuel tanks with any
equipment that is counted under the allowances described in this
section which use engines meeting Phase 2 exhaust emission standards
(see Sec.  1054.627). As part of this expanded rotational-molded fuel
tank allowance, we are requiring that equipment manufacturers first use
up any available credits or allowances generated from early compliance
with the fuel tank permeation requirements (see Section VI.D.4).
    A similar concern applies for controlling running losses. As
described in Section VI, technologies for controlling running losses
may involve a significant degree of integration between engine and
equipment designs. In particular, routing a vapor line from the fuel
tank to the engine's intake system depends on engine modifications that
would allow for this connection. As a result, we are proposing that any
equipment using flex engines would not need to meet running loss
standards.
(b) Coordination Between Engine and Equipment Manufacturers
    We are proposing two separate paths for complying with
administrative requirements related to the proposed transition program,
depending on how the engine manufacturer chooses to make flex engines
available under the transition program. Engine manufacturers choosing
to use the delegated-assembly provisions described above would be
enabling equipment manufacturers to make the decision whether to
complete the engine assembly in the Phase 3 configuration or to use a
noncatalyzed muffler such that the engine would meet Phase 2 standards
and would therefore need to be counted as a flex engine. If engine
manufacturers do not use the delegated-assembly provisions, equipment
manufacturers would need to depend on engine manufacturers to produce
and ship flex engines that are already in a configuration meeting Phase
2 standards and labeled accordingly. Each of these scenarios involves a
different set of compliance provisions, which we describe below.
    (i) Compliance based on engine manufacturers. Engine manufacturers
will in many cases produce complete engines. This would be the case if
the engine does not require a catalyst or if the engine manufacturer
chooses to design their own exhaust systems and ship complete engine
assemblies to equipment manufacturers.
    Under this scenario, we propose to require that equipment
manufacturers request a certain number of flex engines from the engine
manufacturer. The proposed regulatory provisions would specifically
allow engine manufacturers to continue to build and sell Phase 2
engines needed to meet the market demand created by the transition
program for equipment manufacturers provided they receive the written
assurance from the equipment manufacturer that such engines are being
procured for this purpose. We are proposing to require that engine
manufacturers keep copies of the written assurance from equipment
manufacturers for at least five years after the final year in which
allowances are available.
    Engine manufacturers are currently required to label their
certified engines with a variety of information. We are proposing that
engine manufacturers producing complete flex engines under this program
identify on the engine label that they are flex engines. In addition,
equipment manufacturers would be required to apply an Equipment
Flexibility Label to the engine or piece of equipment that identifies
the equipment as using an engine produced under the Phase 3 transition
program for equipment manufacturers. These proposed labeling
requirements would allow EPA to easily identify flex engines and
equipment, verify which equipment manufacturers are using these flex
engines, and more easily monitor compliance with the transition
provisions. Labeling of the equipment could also help U.S. Customs to
quickly identify equipment being imported lawfully using the Transition
Program for Equipment Manufacturers.
    While manufacturers would need to meet Phase 2 standards with their
flex engines, they would not need to certify them for the current model
year. We are proposing instead to apply the requirements in 40 CFR
1068.260, which requires that manufacturers keep records showing that
they meet emission standards without requiring submission of an
application for certification. We request comment on these requirements
and whether these engines should be certified annually along with the
Phase 3 engines.
    (ii) Compliance based on equipment manufacturers. We are proposing
to set up a different set of compliance provisions for engine
manufacturers that ship the engine separately from the exhaust system.
Under this scenario, as discussed above, the engine manufacturers must
establish a relationship with the equipment manufacturers allowing the
equipment manufacturer to install catalysts to complete engine assembly
for compliance with Phase 3 standards.
    In this case, engine manufacturers would design and produce their
Phase 3 engines and label them accordingly. The normal path for these
engines covered by the delegated-assembly provisions would involve
shipment of the engine without an exhaust system to the equipment
manufacturer, the equipment manufacturer would then follow the engine
manufacturer's instructions to add the exhaust system including the
catalyst to bring the engine into a certified Phase 3 configuration.
Under the proposed transition program, equipment manufacturers would
choose for each of these engines to either follow the engine
manufacturer's instructions to install a catalyst to make it compliant
with Phase 3 standards or follow a different set of instructions to
install a non-catalyzed muffler to make it compliant with Phase 2
standards. Any such engines downgraded to Phase 2 standards would count
toward the equipment manufacturer's total number of allowances under
the transition program.
    To make this work, engine manufacturers would need to take certain
steps to ensure overall compliance. First, engine manufacturers would
need to include emission data in the application for certification
showing that the engine would meet Phase 2 standards without any
modification other than installing a non-catalyzed exhaust system. This
may include a specified range of backpressures that equipment
manufacturers would need to meet in procuring a non-catalyst muffler.
If the Phase 3 engine without a catalyst would otherwise still be
covered by the emission data from engines produced in earlier model
years under the Phase 2 standards, manufacturers could rely on
carryover emission data to make this showing. Second, the installation
instructions we specify under the delegated-assembly provisions would
need to describe the steps equipment manufacturers would need to take
to make either Phase 3 engines or Phase 2 flex engines. Third, for
engine families that generate positive emission credits under the
exhaust ABT

program, engine manufacturers must decrease the number of ABT credits
generated by the engine family by 10 percent. We believe the 10 percent
decrease should provide an emission adjustment commensurate with the
potential use of the equipment manufacturer flexibility provisions.
    Equipment manufacturers using allowances under these provisions
would need to keep records that would allow EPA or engine manufacturers
to confirm that equipment manufacturers followed appropriate procedures
and produced an appropriate number of engines without catalysts. In
addition, we are proposing to require that equipment manufacturers
place a label on the engine as close as possible to the engine
manufacturer's emission control information label to identify it as a
flex engine. This could be the full label described above or it could
be a simplified label that has only the equipment manufacturer's name
and a simple statement that this is a flex engine. The location of this
label is important since it effectively serves as an extension of the
engine manufacturer's label, clarifying that the engine meets Phase 2
standards, not the Phase 3 standards referenced on the original label.
This avoids the problematic situation of changing or replacing labels,
or requiring engine manufacturers to send different labels. We request
comment on an approach in which we would require the full label for
equipment manufacturers to be placed on the engine adjacent to the
engine manufacturer's label to prevent confusion and the risks
associated with multiple labels.
    Engine manufacturers might choose to produce Phase 3 engines before
the 2011 model year and set up arrangements for separate shipment of
catalyzed mufflers as described in Section V.E.2. We would expect any
engine manufacturers producing these early Phase 3 engines to continue
production of comparable engine models that meet Phase 2 standards
rather than forcing all equipment manufacturers to accommodate the new
engine design early. We believe it would not be appropriate for
equipment manufacturers to buy Phase 3 engines in 2010 or earlier model
years and downgrade them to meet Phase 2 emission standards as
described above. We are therefore proposing to allow the downgrading of
Phase 3 engines only for 2011 and later model years.
    Because equipment manufacturers in many cases depend on engine
manufacturers to supply certified engines in time to produce complying
equipment, we are also proposing a hardship provision for all equipment
manufacturers (see Sec.  1068.255). An equipment manufacturer would be
required to use all of its allowances under the transition program
described above before being eligible to use this hardship. See Section
VIII.C.9 for further discussion of this proposed hardship provision for
equipment manufacturers.
    As described in Section V.E.2, we are concerned that the Transition
Program for Equipment Manufacturers and the provisions related to
delegated assembly may be redundant approaches to address the need to
design equipment models to accommodate upgraded engines. The transition
program is intended to give equipment manufacturers four years to make
the design changes needed to reach a point of being able to accommodate
low-emission Phase 3 engines, even for the most challenging equipment
models. If equipment manufacturers are able to continue to
independently source their exhaust systems based on the catalyst
specifications determined by the engine manufacturer, it is not clear
that allowances for additional lead time would be needed. We request
comment on the relative advantages of these two approaches and, more
specifically, which approach we should adopt in the final rule to
address equipment manufacturers' needs for designing and producing
equipment with Phase 3 engines. We request comment on an alternative
approach of relying on the delegated-assembly provisions in Sec.
10654.610 and the equipment-manufacturer hardship provisions in Sec.
1068.255. This combination of tools would still allow for substantial
flexibility in helping equipment manufacturers transition to Phase 3
engines. The hardship provisions of Sec.  1068.255 were an important
element of the successful transition to new emission standards for
Large SI engines.
    (iii) Reporting and recordkeeping requirements. Equipment
manufacturers choosing to participate in the transition program would
be required to keep records of the U.S-directed production volumes of
Class II equipment in 2007 through 2009 broken down by equipment model
and calendar year. Equipment manufacturers would also need to keep
records of the number of flex engines they use under this program.
    We are also proposing some notification requirements for equipment
manufacturers. Under this proposal, equipment manufacturers wishing to
participate in the transition provisions would need to notify EPA by
June 30, 2010 that they plan to participate. They must submit
information on production of Class II equipment over the three-year
period from 2007 through 2009, calculate the number of allowances
available, and provide basic business information about the company.
For example, we would want to know the names of related companies
operating under the same parent company that would be required to count
engines together under this program. This early notification will not
be a significant burden to the equipment manufacturer and will greatly
enhance our ability to ensure compliance. Indeed, equipment
manufacturers would need to have the information required in the
notification to know how to use the allowances.
    We are proposing an ongoing reporting requirement for equipment
manufacturers participating in the Phase 3 transition program. Under
this proposal, participating equipment manufacturers would be required
to submit an annual report to EPA that shows its annual number of
equipment produced with flex engines under the transition provisions in
the previous year. Each report would include a cumulative count of the
number of equipment produced with flex engines for all years. To ease
the reporting burden on equipment manufacturers, EPA intends to work
with the manufacturers to develop an electronic means for submitting
information to EPA.
(c) Additional Allowances for Small- and Medium-Sized Companies
    We believe small-volume equipment manufacturers would need a
greater degree of lead time than manufacturers that sell large volumes
of equipment. The small companies are less likely to have access to
prototype engines from engine manufacturers and generally have smaller
engineering departments for making the necessary design changes.
Allowances representing thirty percent of annual U.S.-directed
production provide larger companies with substantial lead time to plan
their product development for compliance but smaller companies may have
a product mix that requires extensive work to redesign products in a
short amount of time. We are therefore proposing to specify that small-
volume equipment manufacturers may use this same transition program
with allowances totaling 200 percent of the average annual U.S.-
directed production of equipment using Class II engines from 2007
through 2009. For purposes of this program, a small-volume equipment
manufacturer would be a manufacturer that produces fewer than 5,000
pieces of nonhandheld equipment

per year subject to EPA regulations in each of the three years from
2007 through 2009 or meets the SBA definition of small business
equipment manufacturer (i.e., generally fewer than 500 employees for
manufacturers of most types of equipment). These allowances would be
spread over the same four-year period between 2011 and 2014. For
example, a small-volume equipment manufacturer could potentially use
Phase 2 engines on all their Class II equipment for two years or they
might sell half their Class II equipment with Phase 2 engines for four
years assuming production stayed constant over the four years.
    Medium-sized equipment manufacturers, i.e., companies that produce
too much equipment to be considered a small-volume equipment
manufacturer but produce fewer than 50,000 pieces of Class II
equipment, may also face difficulties similar to that of small-volume
equipment manufacturers. These companies may be like small-volume
manufacturers if they have numerous product lines with varied
approaches to installing engines and mufflers. Other companies may be
more like bigger companies if they produce most of their equipment in a
small number of high-volume models or have consistent designs related
to engine and muffler installations. We are therefore proposing to
create special provisions that would enable us to increase the number
of transition allowances that are available to these medium-sized
companies that have annual U.S.-directed production of Class II
equipment of between 5,000 and 50,000 in each of the three years from
2007 through 2009. To obtain allowances greater than 30 percent of
average annual production, a medium-sized manufacturer would need to
notify us by January 31, 2010 if they believe the standard allowances
based on 30 percent of average annual production of Class II equipment
would not provide adequate lead time starting in the 2011 model year.
Additional allowances could be requested only if the equipment
manufacturer can show they are on track to produce a number of
equipment models representing at least half of their total U.S.-
directed production volume of Class II equipment in the 2011 model year
compliant with all exhaust and evaporative emission standards. As part
of their request, the equipment manufacturer would need to describe why
more allowances are needed to accommodate anticipated changes in engine
designs resulting from engine manufacturers' compliance with changing
exhaust emission standards. The equipment manufacturer would also
request a specific number of additional allowances needed with
supporting information to show why that many allowances are needed. We
may approve additional allowances up to 70 percent of the average
annual U.S.-directed production of Class II equipment from 2007 through
2009. If a medium-sized company were granted the full amount of
additional allowances, they would have allowances equivalent to 100
percent of the average annual production volume of Class II equipment.
    As noted above, the determination of whether a company is a small-
or medium-sized manufacturer will be based primarily on production data
over the 2007 through 2009 period submitted to EPA during 2010. After a
company's status as a small- or medium-sized company has been
established based on that data, EPA is proposing that manufactures
would keep that status even if a company's production volume grows
during the next few years, such that the company would no longer
qualify as a small- or medium-sized company. EPA believes that
equipment manufacturers need to know at the beginning of the transition
program (i.e., 2011) how many allowances they will receive under the
program. Changing a company's size determination during the program,
which could affect the number of allowances available, would make it
difficult for companies to plan and could lead to situations where a
company is in violation of the provisions based on the use of
allowances that were previously allowed. Likewise, if a company is
purchased by another company or merges with another company after the
determination of small- or medium-size status is established in 2010,
EPA is proposing that the combined company could, at its option, keep
the status for the individual portions of the combined company. If the
combined company chooses to keep the individual designations, the
combined company would submit the annual reports on the use of
allowances broken down for each of the previously separate companies.
    (i) Requirements for foreign equipment manufacturers and importers.
Under this proposal, only companies that manufacture equipment would
qualify for the relief provided under the Phase 3 transition
provisions. Foreign equipment manufacturers who comply with the
compliance related provisions discussed below would enjoy the same
transition provisions as domestic manufacturers. Foreign equipment
manufacturers that do not comply with the compliance-related provisions
discussed below would not receive allowances. Importers that do not
manufacture equipment would not receive any transition relief directly,
but could import equipment with a flex engine if it is covered by an
allowance or transition provision associated with a foreign equipment
manufacturer. This would allow transition provisions to be used by
foreign equipment manufacturers in the same way as domestic equipment
manufacturers, at the option of the foreign manufacturer, while
avoiding the potential for importers to inappropriately use allowances.
For the purposes of this proposal, a foreign equipment manufacturer
would include any equipment manufacturer that produces equipment
outside of the United States that is eventually sold in the United
States.
    All foreign equipment manufacturers wishing to use the transition
provisions would have to comply with all requirements discussed above.
Along with the equipment manufacturer's notification described earlier,
a foreign equipment manufacturer would have to comply with various
compliance related provisions similar to those adopted for nonroad
diesel engines (see Sec.  1054.626).\81\ As part of the notification,
the foreign equipment manufacturer would have to:
---------------------------------------------------------------------------

    \81\ See, for example, 40 CFR 80.410 concerning provisions for
foreign refiners with individual gasoline sulfur baselines.
---------------------------------------------------------------------------

     Agree to provide EPA with full, complete and immediate
access to conduct inspections and audits;
     Name an agent in the District of Columbia for service;
     Agree that any enforcement action related to these
provisions would be governed by the Clean Air Act;
     Submit to the substantive and procedural laws of the
United States;
     Agree to additional jurisdictional provisions;
     Agree that the foreign equipment manufacturer will not
seek to detain or to impose civil or criminal remedies against EPA
inspectors or auditors for actions performed within the scope of EPA
employment related to the provisions of this program;
     Agree that the foreign equipment manufacturer becomes
subject to the full operation of the administrative and judicial
enforcement powers and provisions of the United States without
limitation based on sovereign immunity; and
     Submit all reports or other documents in the English
language, or include an English language translation.

    In addition to these proposed requirements, we are proposing to
require foreign equipment manufacturers that participate in the
transition program to comply with a bond requirement for equipment
imported into the United States. We describe a bond program below that
we believe could be an important tool for ensuring that foreign
equipment manufacturers are subject to the same level of enforcement as
domestic equipment manufacturers. Specifically, we believe a bonding
requirement for the foreign equipment manufacturer is an important
enforcement tool for ensuring that EPA has the ability to collect any
judgments assessed against a foreign equipment manufacturer for
violations of these transition provisions. We request comments on all
aspects of the specific program we describe here, but also on
alternative measures that would achieve the same goal.
    Under a bond program, the participating foreign equipment
manufacturer would have to maintain a bond in the proper amount that is
payable to satisfy judgments that result from U.S. administrative or
judicial enforcement actions for conduct in violation of the Clean Air
Act. The foreign equipment manufacturer would generally obtain a bond
in the proper amount from a third party surety agent that has been
listed with the Department of the Treasury. As discussed in Sections
V.E.6.c and V.E.6.d, EPA is proposing other bond requirements as well.
An equipment manufacturer required to post a bond under any of these
provisions would be required to obtain only one bond of the amount
specified for those sections.
    In addition to the foreign equipment manufacturer requirements
discussed above, EPA also proposes to require importers of equipment
with flex engines from a complying foreign equipment manufacturer to
comply with certain provisions. EPA believes these importer provisions
are essential to EPA's ability to monitor compliance with the
transition provisions. EPA proposes that the regulations would require
each importer to notify EPA prior to their initial importation of
equipment with flex engines. Importers would be required to submit
their notification prior to the first calendar year in which they
intend to import equipment with flex engines from a complying foreign
equipment manufacturer. The importer's notification would need to
include the following information:
     The name and address of importer (and any parent company);
     The name and address of the manufacturers of the equipment
and engines the importer expects to import; and
     Number of units of equipment with flex engines the
importer expects to import for each year broken down by equipment
manufacturer.
    In addition, EPA is proposing that any importer electing to import
to the United States equipment with flex engines from a complying
foreign equipment manufacturer would have to submit annual reports to
EPA. The annual report would include the number of units of equipment
with flex engines the importer actually imported to the United States
in the previous calendar year; and identify the equipment manufacturers
and engine manufacturers whose equipment and engines were imported.
(4) Equipment Manufacturer Recertification
    Generally, it has been engine manufacturers who certify with EPA
for exhaust emissions because the standards are engine-based. However,
because the Phase 3 nonhandheld standards under consideration are
expected to result in the use of catalysts, a number of equipment
manufacturers, especially those that make low-volume models, believe it
may be necessary to produce their own unique engine/muffler designs,
but using the same catalyst substrate already used in a muffler
certified by the engine manufacturer. In this situation, the engine
would not be covered by the engine manufacturer's certificate, as the
engine/muffler design is not within the specifications for the
certified engine. The equipment manufacturer is therefore producing a
new distinct engine which is not certified and needs to be certified
with EPA. In order to allow the possibility of an equipment
manufacturer certifying an engine/muffler design with EPA, we are
proposing a simplified engine certification process for nonhandheld
equipment manufacturers (see Sec.  1054.612). Under this simplified
certification process, the nonhandheld equipment manufacturer would
need to demonstrate that it is using the same catalyst substrate as the
approved engine manufacturer's engine family, provide information on
the differences between their engine/exhaust system and the engine/
exhaust system certified by the engine manufacturer, and explain why
the emissions deterioration data generated by the engine manufacturer
would be representative for the equipment manufacturer's configuration.
The equipment manufacturer would need to perform low-hour emission
testing on an engine equipped with their modified exhaust system and
demonstrate that it meets the emission standards after applying the
engine manufacturer's deterioration factors for the certified engine
family. We would not require production-line testing for these engines.
The equipment manufacturer would be responsible to meet all of the
other requirements of an engine manufacturer under the regulations,
including labeling, warranty, defect reporting, payment of
certification fees, and other things. EPA requests comments on the
usefulness of such a provision. EPA also requests comments on whether
such a simplified certification provision should expire after a period
of time, for example, after five years. If the provision were to
expire, an equipment manufacturer could continue to certify, but they
would have to follow the general certification regulations at that
point.
(5) Special Provisions Related to Altitude
    As described in Section V.C.1, we allow manufacturers of handheld
and nonhandheld engines to comply with emission standards at high
altitudes using an altitude kit. We are proposing to keep the
provisions that already apply in part 90 related to descriptions of
these altitude kits in the application for certification. This would
include a description of how engines comply with emission standards at
varying atmospheric pressures, a description of the altitude kits, and
the associated part numbers. The manufacturer would also identify the
altitude range for which it expects proper engine performance and
emission control with and without the altitude kit, state that engines
will comply with applicable emission standards throughout the useful
life with the altitude kit installed according to instructions, and
include any supporting information. Finally, manufacturers would need
to describe a plan for making information and parts available such that
altitude kits would reasonably be expected to be widely used in high-
altitude areas. For nonhandheld engines, this would involve all
counties with elevations substantially above 4,000 feet (see Appendix
III to part 1054). This includes all U.S. counties where 75 percent of
the land mass and 75 percent of the population are above 4,000 feet
(see 45 FR 5988, January 24, 1980 and 45 FR 14079, March 4, 1980). For
handheld engines, this would involve all areas at an elevation at or
above that which they identify in their application

for certification for needing an altitude kit to meet emission
standards.
    We are also proposing to require information related to altitude
kits to be on the emission control information label, unless space
limitations prevent it. We believe it is important for operators to
know that engines may need to be modified to run properly at high
elevations.
    We request comment on all aspects of this approach for compliance
at high-altitude conditions. (See Sec. Sec.  1054.115, 1054.135,
1054.205, and 1054.655.)
(6) Special Provisions for Compliance Assurance
    EPA's experiences in recent years have highlighted the need for
more effective tools for preventing the introduction into commerce of
noncompliant engines. These include noncompliant engines sold without
engine labels or with counterfeit engine labels. We are proposing the
special provisions in the following sections to help us address these
problems.
(a) Importation Form
    Importation of engines is regulated both by EPA and U.S. Customs.
The current regulations for U.S. Customs specify that anyone importing
a nonroad engine (or equipment containing a nonroad engine) must
complete a declaration form before importation. EPA has created
Declaration Form 3520-21 for this purpose. Customs requires this in
many cases, but there are times when they allow engines to be imported
without the proper form. It would be an important advantage for EPA's
own compliance efforts to be able to enforce this requirement. We are
therefore proposing to modify part 90 to mirror the existing Customs
requirement (and the EPA requirement in Sec.  1068.301) for importers
to complete and retain the declaration form before importing engines
(see Sec.  90.601). This would facilitate a more straightforward
processing of cases in which noncompliant products are brought to a
U.S. port for importation because currently no requirement exists for
measuring emissions or otherwise proving that engines are noncompliant
at the port facility. Since this is already a federal requirement, we
are proposing to make this effective immediately with the final rule.
(b) Assurance of Warranty Coverage
    Manufacturers of Small SI engines subject to the standards are
required to provide an emission-related warranty so owners are able to
have repairs done at no expense for emission-related defects during an
initial warranty period. Established companies are able to do this with
a network of authorized repair facilities that can access replacement
parts and properly correct any defects. In contrast, we are aware that
some manufacturers are selling certified engines in the United States
without any such network for processing warranty claims. As such,
owners who find that their engines have an emission-related defect are
unable to properly file a warranty claim or get repairs that should be
covered by the warranty. In effect, this allows companies to certify
their engines and agree to provide warranty coverage without ever
paying for legitimate repairs that should be covered by the warranty.
We are therefore proposing to require that manufacturers demonstrate
several things before we will approve certification for their engines
(see Sec.  90.1103 and Sec.  1054.120). The following provisions would
apply to manufacturers who certify engines, and would include importers
who certify engines. First, we are proposing to require manufacturers
to provide and monitor a toll-free telephone number and an e-mail
address for owners to receive information about how to make a warranty
claim and how to make arrangements for authorized repairs. Second, we
are proposing to require manufacturers to provide a source of
replacement parts within the United States. For imported parts, this
would require at least one distributor within the United States.
    Finally, we are proposing to require manufacturers to have a
network of authorized repair facilities or to take one of several
alternate approaches to ensure that owners will be able to get free
repair work done under warranty. If warranty-related repairs are
limited to authorized repair facilities, we are proposing to require
that manufacturers have enough such facilities that owners do not have
to go more than 100 miles for repairs. An exception would be made for
remote areas where we would allow for approval of greater travel
distances for getting repairs as long as the longer travel distance
applies to no more than 10 percent of affected owners. For small
businesses, start-up companies, or importers, it may not be realistic
to maintain a national repair network. We are proposing a variety of
alternative methods for such companies to meet their warranty
obligations. Manufacturers would be able to meet warranty obligations
by informing owners that free shipping to and from an authorized
service center is available, a service technician will be provided to
come to the owner to make the warranty repair, or repair costs at a
local nonauthorized service center will be reimbursed.
    We believe these proposed requirements are both necessary and
effective for ensuring proper warranty coverage for all owners. At the
same time, we are proposing a flexible approach that allows companies
to choose from widely varying alternatives to provide warranty service.
We therefore believe these proposed requirements are readily achievable
for any company. We are therefore proposing to implement these
requirements starting with the 2009 model year. This should allow time
for the administrative steps necessary to arrange for any of the
allowable compliance options described above. We request comment on
these provisions to ensure proper warranty coverage. We also request
comment on alternative means of demonstrating effective warranty
coverage comparable to that described above.
(c) Bond Requirements Related to Enforcement and Compliance Assurance
    Certification initially involves a variety of requirements to
demonstrate that engines and equipment are designed to meet applicable
emission standards. After certification is complete, however, several
important obligations apply to the certifying manufacturer or importer.
For example, we require ongoing testing of production engines, warranty
coverage for emission-related defects, reporting of recurring defects,
and payment of penalties if there is a violation. For companies
operating within the United States, we are generally able to take steps
to communicate clearly and insist on compliance with applicable
regulations. For companies without staff or assets in the United
States, this is not the case. Accordingly, we have limited ability to
enforce these requirements or recover any appropriate penalties, which
increases the risk of environmental problems as well as problems for
owners. This creates the potential for a company to gain a competitive
advantage if they do not operate in the United States by avoiding some
of the costs of complying with EPA regulations.
    We request comment on a requirement for importers of certified
engines and equipment to post a bond to cover any potential compliance
or enforcement actions under the Clean Air Act. Importers would be
exempt from the bond requirement if they were able to sufficiently
demonstrate an assurance that they would meet any compliance-or
enforcement-related obligations. We

would consider adopting provisions to waive the bonding requirement
based on a variety of specific criteria. For example, importers might
show that they have physical assets in the United States with a value
equal to the retail value of the engines that they will import during
the model year (or equipment that they will import during the model
year if they import equipment). Also, we may be able to establish an
objective measure for a company to demonstrate long-term compliance
with applicable regulations. Another alternative might involve a
showing that an importer has been certified under certain industry
standards for production quality and regulatory compliance. Finally, we
may be able to rely on a company's commitment to periodically perform
voluntary in-use testing in the United States to show that engines
comply with emission standards. In addition to these specific criteria,
we would consider adopting a provision that allows an individual
importer to request a waiver from bonding requirements based on that
importer's particular circumstances. If we adopt a bonding requirement,
we would expect to apply that starting with the 2009 model year.
    We would expect the per-engine bond amount to be $25 for handheld
engines and Class I engines. Class II engines cover a much wider range
of applications, so we further differentiate the bond for those
engines. The proposed per-engine bond amounts for Class II engines
would be $50 for engines between 225 and 740 cc, $100 for engines
between 740 and 1,000 cc, and $200 for engines above 1,000 cc. These
values are generally scaled to be approximately 10 to 15 percent of the
retail value. In the case of handheld engines, this is based on the
retail value of equipment with installed engines, since these products
are generally traded that way. Class II engines are very often sold as
loose engines to equipment manufacturers, so the corresponding per-
engine bond values are based on the retail value of the engine alone.
This approach is similar to the bond requirements that apply for
nonroad diesel engines (see Sec.  1039.626).
    The total bond amount would be based on the value of imported
products over a one-year period. If an importer's bond would be used to
satisfy a judgment, the importer would then be required to increase the
amount of the bond within 90 days of the date the bond is used to cover
the amount that was used. Also, we would require the bond to remain in
place for five years after the importer no longer imports Small SI
engines.
    (d) Bond Requirements Related to Recall
    Recall is another potential compliance obligation. The Clean Air
Act specifies that EPA must require the manufacturer to conduct a
recall if EPA determines that a substantial number of engines do not
conform to the regulations. We have experience with companies that have
faced compliance-related problems where it was clear that they did not
have the resources to conduct a recall if that were necessary. Such
companies benefit from certification without bearing the full range of
associated obligations. We believe it is appropriate again to add a
requirement to post a bond to ensure that a company can meet their
recall obligations. The concern for being able to meet these
obligations applies similarly to domestic and foreign manufacturers.
The biggest indicator of a manufacturer's ability to make recall
repairs relates to the presence of repair facilities in the United
States. We are therefore proposing a bond requirement starting with the
2009 model year for all manufacturers (including importers) that do not
have assembly facilities in the United States that are available for
processing recall repairs or a repair network in the United States
capable of processing recall repairs (see Sec.  90.1007 and Sec.
1054.685). Note that a single bond payment would be required for
companies that must post bond for compliance-related obligations, as
described above, in addition to the recall-related obligations. Such a
repair network would need to involve at least 100 authorized repair
facilities in the United States or at least one such facility for each
5,000 engines sold in the United States, whichever is less. Companies
not meeting these criteria would need to post a bond as described above
for compliance assurance. We would allow these companies to arrange for
any applicable recall repairs to be done at independent facilities.
(e) Restrictions Related to Naming Model Years
    New exhaust emission standards apply based on the date of engine
assembly. We similarly require that equipment manufacturers use engines
meeting emission standards in the same model year as equipment based on
the equipment assembly date. For example, a manufacturer of a 2007
model year piece of equipment must generally use a 2007 model year
engine. However, we allow equipment manufacturers to deplete their
normal inventories of engines from the previous model year as long as
there is no stockpiling of those earlier engines. We also note that
this restriction does not apply if emission standards are unchanged for
the current model year. We have found many instances where companies
will import new engines usually installed in equipment and claim that
the engine was built before emission standards took effect, even if the
start date for emission standards was several years earlier. We believe
many of these engines were in fact built later than the named model
year, but it is difficult to prove the date of manufacture, which then
makes it difficult to properly enforce these requirements. Now that
emission standards have been in place for Small SI engines for almost
ten years, we believe it is appropriate to implement a provision that
prevents new engines manufactured several years previously to be
imported when more recent emission standards have been adopted. This
would prevent companies from importing noncompliant products by
inappropriately declaring a manufacture date that precedes the point at
which the current standards started to apply. It would also put a time
limit on our existing provisions that allow for normal inventory
management to use the supply of engines from previous model years when
there has been a change in standards.
    Starting January 1, 2009, we are proposing to specify that engines
and equipment will be treated as having a model year at most one year
earlier than the calendar year in which the importation occurs when
there is a change in emission standards (see Sec.  90.616 and Sec.
1054.695). For example, for new standards starting in the 2011 model
year, beginning January 1, 2012, all imported new products would be
considered 2011 or later model year engines and would need to comply
with new 2011 standards, regardless of the actual build date of the
engines or equipment. (Engines or equipment would be considered new
unless the importer demonstrates that the engine or equipment had
already been placed into service, as described below.) This would allow
a minimum of twelve months for manufactured engines to be shipped to
equipment manufacturers, installed in equipment and imported into the
United States. This time interval would be substantially longer for
most engines because the engine manufacturer's model year typically
ends well before the end of the calendar year. Also, engines produced
earlier in the model year would have that much more time to be shipped,
installed, and imported.
    Manufacturers have expressed concern that the one-year limitation
on imported products may be too short

since there are often delays related to shipping, inventory, and
perhaps most significantly, unpredictable fluctuations in actual sales
volumes. We do not believe it is appropriate to maintain long-term
inventories of these products outside the United States for eventual
importation when it is clear several years ahead that the new standards
are scheduled to take effect. Companies may be able to import these
products shortly after manufacturing and keep their inventories in a
U.S. distribution network to avoid the situation of being unable to
sell these products. We request comment on the need to extend the one-
year limit to account for the business dynamics. We also request
comment on any narrower provisions that would allow for exceptions in
certain circumstances. For example, should we consider allowing an
additional year for products if manufacturers let us know ahead of time
that they have certain numbers of engines or equipment that will not be
imported in time, and they can demonstrate that they are not
stockpiling or circumventing regulatory requirements?
    In years where the standards do not change, this proposed provision
would have no practical effect because, for example, a 2004 model year
engine meets the 2006 model year standards. We would treat such an
engine as compliant based on its 2004 emission label, any emission
credit calculations for the 2004 model year, and so on. These engines
could therefore be imported anytime until the end of the calendar year
in which new standards take effect. Also, because the changes do not
affect importation until there is a change in the standards, we are
proposing to implement these provisions starting with the Phase 3
standards.
    We do not intend for these proposed provisions to delay the
introduction of emission standards by one year. It is still a violation
to produce an engine in the 2011 calendar year and call it a 2010 model
year engine to avoid being subject to 2011 standards.
    Importation of equipment that is not new is handled differently.
These products would not be required to be upgraded to meet new
emission standards that started to apply after the engine and equipment
were manufactured. However, to avoid the situation where companies
simply declare that they are importing used equipment to avoid new
standards, we are proposing to require that they provide clear and
convincing evidence that such engines have been placed into service
prior to importation. Such evidence would generally include documentary
evidence of purchase and maintenance history and visible wear that is
consistent with the reported manufacture date. Importing products for
resale or importing more than one engine or piece of equipment at a
time would generally call for closer evaluation to determine that this
degree of evidence has been met.
(f) Import-Specific Information at Certification
    We are proposing to require additional information to improve our
ability to oversee compliance related to imported engines (see Sec.
90.107 and Sec.  1054.205). In the application for certification, we
are proposing to require the following additional information: (1) The
port or ports at which the manufacturer intends to import the engines,
(2) the names and addresses of the agents the manufacturer has
authorized to import the engines, and (3) the location of the test
facilities in the United States where the manufacturer would test the
engines if we select them for testing under a selective enforcement
audit. This information should be readily available so we propose to
require it for the 2009 model year. The current regulations in part 90
do not include these specific requirements; however, we do specify
already that we may select imported engines at a port of entry. In such
a case, we would generally direct the manufacturer to do testing at a
facility in the United States. The proposed provision allows the
manufacturers to make these arrangements ahead of time rather than
relying on EPA's selection of a test lab. The current regulations also
state clearly in Sec.  90.119 that EPA may conduct testing at any
facility to determine whether engines meet emission standards.
(g) Counterfeit Emission Labels
    We have observed that some importers attempt to import noncompliant
products by creating an emission control information label that is an
imitation of a valid label from another company. We are not proposing
to require that certifying manufacturers take steps to prevent this,
but we are proposing to include a provision that specifically allows
manufacturers to add appropriate features to prevent counterfeit
labels. This may include the engine's serial number, a hologram, or
some other unique identifying feature. We propose to apply this
provision immediately upon completion of the final rule since it is an
allowance and not a requirement (see Sec.  1054.135).
(h) Partially Complete Engines
    As described in Section XI, we are proposing to clarify engine
manufacturers' responsibilities for certification with respect to
partially complete engines. While this is intended to establish a path
for secondary engine manufacturers to get their engines from the
original engine manufacturer, we are aware that this will also prevent
manufacturers from selling partially complete engines as a strategy to
circumvent certification requirements. If long blocks or engines
without fuel systems are introduced into U.S. commerce, either the
original manufacturer or the company completing engine assembly would
need to hold a certificate for that engine.
(7) Using Certified Small SI Engines in Marine Applications
    Manufacturers have described situations in which Small SI engines
are used in marine applications. As described in Section III.E.5, we
are proposing to allow certified Small SI engines to be used in
outboard or personal watercraft applications without certifying to the
Marine SI emission standards in part 1045. We request comment on the
appropriateness of this provision. In particular, we request comment on
the extent to which the proposed provisions will address the unique
situations that apply for swamp boats and other unusual configurations.
(8) Other Provisions
    We are also proposing a variety of changes in the provisions that
make up the certification and compliance program. Most of these changes
serve primarily to align with the regulations we have started to apply
to other types of engines.
    The proposed warranty provisions are based on the requirements that
already apply under 40 CFR part 90. We are proposing to add an
administrative requirement to describe the provisions of the emission-
related warranty in the owners manual. We expect that many
manufacturers already do this but believe it is appropriate to require
this as a routine practice. (See Sec.  1054.120.) Testing new engines
requires a period of engine operation to stabilize emission levels. The
regulations specify two separate figures for break-in periods for
purposes of certification testing. First, engines are generally
operated long enough to stabilize emission levels. Second, we establish
a limit on how much an engine may operate and still be considered a
``low-hour'' engine. The results of testing with the low-hour engine
are compared with a deteriorated

value after some degree of service accumulation to establish a
deterioration factor. For Marine SI engines, we are proposing that the
engine can be presumed to have stabilized emission levels after 12
hours of engine operation, with a provision allowing approval for more
time if needed, and we generally require that low-hour test engines
have no more than 30 hours of engine operation. However, given the
shorter useful life for many Small SI engines, this would not make for
a meaningful process for establishing deterioration factors. For
example, emission levels in Small SI engines may not stabilize before
deterioration begins to affect emission levels, which would prevent the
engine from ever truly having stabilized emission levels. Also, the
low-hour emission test should occur early enough to adequately
represent the deterioration over the engine's lifetime.
    We are proposing that Small SI engines with a useful life above 300
hours can be presumed stable after 12 hours with low-hour testing
generally occurring after no more than 24 hours of engine operation.
For Small SI engines with useful life below 300 hours, we are proposing
a combination of provisions to address this concern. First, we are
proposing to allow manufacturers to establish a stabilization period
that is less than 12 hours without showing that emission levels have
fully stabilized (see Sec.  1054.501). Second, we propose to specify
that low-hour testing must generally occur after no more than 15 hours
of engine operation (see Sec.  1054.801). This allows some substantial
time for break-in, stabilization, and running multiple tests, without
approaching a significant fraction of the useful life. Third, we are
proposing that manufacturers consistently test low-hour production-line
engines (and emission-data engines in the case of carryover
deterioration factors for certification) using the same degree of
service accumulation to avoid inaccurate application of deterioration
factors (see Sec.  1054.301).
    As described in Section VII.C, we are proposing to clarify the
maintenance that manufacturers may perform during service accumulation
as part of the certification process. The general approach is to allow
any amount of maintenance that is not emission-related, but to allow
emission-related maintenance only if it is a routine practice with in-
use engines. In most of our emission control programs we specify that
80 percent of in-use engines should undergo a particular maintenance
step before manufacturers can do that maintenance during service
accumulation for certification testing. We are aware that Small SI
engines are predominantly operated by homeowners with widely varying
practices in servicing their lawn and garden equipment. As such,
achieving a rate of 80 percent may be possible only for the most
obvious maintenance steps. We are therefore proposing a more
accommodating approach for Small SI engines. In particular, we are
proposing to allow manufacturers to perform a maintenance step during
certification based on information showing that 60 to 80 percent of in-
use engines get the specified maintenance at the recommended interval.
We would approve the use of such maintenance based on the relative
effect on performance and emissions. For example, we may allow
scheduled fuel-injector replacement if survey data show this is done at
the recommended interval for 65 percent of engines and performance
degradation is shown to be roughly proportional to the degradation in
emission control for engines that do not have their fuel injectors
replaced.
    One maintenance step of particular interest will be replacement of
air filters. In larger spark-ignition engines, we don't treat
replacement of air filters as critical emission-related maintenance,
largely because those engines have feedback controls to compensate for
changes in varying pressure drop across the air filter. However, for
Small SI engines varying air flow through the air filter has a direct
effect on the engine's air-fuel ratio, which in turn directly affects
the engine's emission rates for each of the regulated pollutants.
Service accumulation generally takes place in laboratory conditions
with far less debris, dust, or other ambient particles that would cause
filter loading, so filter changes should be unnecessary to address this
conventional concern. We are concerned that the greater affect is from
fuel and oil that may deposit on the back side of the filter,
especially from crankcase ventilation into the intake. If filters are
changed before an emission test, this effect will go undetected. If
filter changes are disallowed before emission testing, manufacturers
would need to design their intake systems to prevent internal filter
contamination. We request comment on the need for replacing air
filters, the effect on emission levels, and on the extent of change
that would be needed to prevent filter contamination from recirculating
crankcase gases. We also request comment on the extent to which air
filters are changed with in-use engines. While this is clearly done
with many engines, it is not clear that the experience is common enough
that we would consider it to be routine, and therefore appropriate for
certification engines. Since the cost of equipment, the types of jobs
performed, and the operating lifetime varies dramatically for Class I
and Class II engines, commenters should distinguish between in-use
maintenance that is done by engine class as much as possible. We may,
for example, conclude that owners of riding mowers and other Class II
equipment routinely replace air filters to keep their equipment
operating properly, while owners of walk-behind mowers and other Class
I equipment are more likely to treat their equipment as a disposable
product and therefore not replace the air filter.
    We are proposing to define criteria for establishing engine
families that are very similar to what is currently specified in 40 CFR
part 90. We are proposing to require that engines with turbochargers be
in a different family than naturally aspirated engines since that would
be likely to substantially change the engine's emission
characteristics. Very few if any Small SI engines are turbocharged
today so this change will not be disruptive. We are also specifying
that engines must have the same number, arrangement, and approximate
bore diameter of cylinders. This will help us avoid the situation where
manufacturers argue that engines with substantially different engine
blocks should be in the same engine family. We would expect to
implement this provision consistent with the approach adopted by
California ARB in which they limit engine families to include no more
than 15 percent variation in total engine displacement. Similarly, the
current regulations in part 90 do not provide a clear way of
distinguishing engine families by cylinder dimensions (bore and stroke)
so we are also proposing to change part 90 to limit the variation in
displacement within an engine family to 15 percent. (See Sec.  1054.230
and Sec.  90.116.)
    The test procedures for Small SI engines are designed for engines
operating in constant-speed applications. This covers the large
majority of affected equipment; however, we are aware that engines
installed in some types of equipment, such as small utility vehicles or
go carts, are not governed to operate only at a single rated speed.
These engines would be certified based on their emission control over
the constant-speed duty cycle even though they do not experience
constant-speed operation in use. We are not prepared to propose a

new duty cycle for these engines but we are proposing to require engine
manufacturers to explain how their emission control strategy is not a
defeat device in the application for certification. For example, if
engines will routinely experience in-use operation that differs from
the specified duty cycle for certification, the manufacturer should
describe how the fuel-metering system responds to varying speeds and
loads not represented by the duty cycle. We are also proposing to
require that engine distributors and equipment manufacturers that
replace installed governors must have a reasonable technical basis for
believing that the effectiveness of the modified engine's emission
controls over the expected range of in-use operation will be similar to
that measured over the specified duty cycle (see Sec.  1054.650). This
may require test data. While this does not require a new certificate of
conformity, it may require testing to confirm that the engine
modification should not be considered tampering. In addition, we would
require that engine distributors and equipment manufacturers notify the
engine manufacturer before modifying the engine, follow any
instructions from the engine manufacturer related to the emission
control system, and avoid making any other changes to the engine that
would remove it from its certified configuration. We request comment on
these provisions.

F. Small Business Provisions

(1) Small Business Advocacy Review Panel
    On August 17, 2006, we convened a Small Business Advocacy Review
Panel (SBAR Panel or the Panel) under section 609(b) of the Regulatory
Flexibility Act (RFA), as amended by the Small Business Regulatory
Enforcement Fairness Act of 1996 (SBREFA). The purpose of the Panel was
to collect the advice and recommendations of representatives of small
entities that could be affected by this proposed rule and to prepare a
report containing the Panel's recommendations for small entity
flexibilities based on those comments, as well as on the Panel's
findings and recommendations regarding the elements of the Initial
Regulatory Flexibility Analysis (IRFA) under section 603 of the RFA.
Those elements of an IRFA are:
     A description of, and where feasible, an estimate of the
number of small entities to which the proposed rule will apply;
     A description of projected reporting, recordkeeping, and
other compliance requirements of the proposed rule, including an
estimate of the classes of small entities that will be subject to the
requirements and the type of professional skills necessary for
preparation of the report or record;
     An identification, to the extent practicable, of all
relevant Federal rules that may duplicate, overlap, or conflict with
the proposed rule; and
     A description of any significant alternative to the
proposed rule that accomplishes the stated objectives of applicable
statutes and that minimizes any significant economic impact of the
proposed rule on small entities.
    The report of the Panel has been placed in the rulemaking record
for this proposal.
    In addition to EPA's Director of the Office of Regulatory
Management and Information who acted as chairperson, the Panel
consisted of the Director of the EPA's Assessment and Standards
Division of the Office of Transportation and Air Quality, the
Administrator of the Office of Management and Budget's Office of
Information and Regulatory Affairs, and the Chief Counsel for Advocacy
of the Small Business Administration.
    Using definitions provided by the Small Business Administration
(SBA), companies that manufacture internal-combustion engines and that
employ fewer than 1,000 people are considered small businesses for the
SBAR Panel. Companies that manufacture equipment and that employ fewer
than 500 people, or fewer than 750 people for manufacturers of
construction equipment, or fewer than 1,000 people for manufacturers of
generators, are considered small businesses for the SBAR Panel. Based
on this information, we asked 25 companies that met the SBA small
business thresholds to serve as small entity representatives for the
duration of the Panel process. Of these 25 companies, 14 of them
represented a cross-section of Small SI engine manufacturers, equipment
manufacturers, and fuel system component manufacturers. (The rest of
the companies were involved in the Marine SI market.)
    With input from small entity representatives, the Panel drafted a
report providing findings and recommendations to us on how to reduce
the potential burden on small businesses that may occur as a result of
this proposed rule. The Panel report is included in the rulemaking
record for this proposal. In light of the Panel report, and where
appropriate, we have identified provisions anticipated for the proposed
rule. The proposed flexibility options, based on the recommendations of
the Panel, are described below.
(2) Proposed Burden Reduction Approaches for Small-Volume Nonhandheld
Engine Manufacturers
    We are proposing several provisions for small business nonhandheld
engine manufacturers. The purpose of these provisions is to reduce the
burden on companies for which fixed costs cannot be distributed over a
large number of engines. We request comment on the appropriateness of
these provisions which are described in detail below.
    Under EPA's current Phase 2 regulations, EPA provided a number of
provisions for small-volume engine manufacturers. For the Phase 2
regulations, the criteria for determining if a company was a ``small-
volume engine manufacturer'' was based on whether the company projected
at time of certification to have production of no more than 10,000
nonhandheld engines per year (excluding engines sold in California that
are subject to the California ARB standards). Based on past experience,
EPA believes that determining the applicability of the provisions based
on number of employees, as compared to volume of products, can be more
problematic given the nature of the workforce in terms of full-time,
part-time, contract, overseas versus domestic, and parent companies.
EPA believes it can avoid these potential complications and still
provide relief to nearly all small businesses by continuing to use the
annual sales criteria for determining which entities qualify as a small
volume engine manufacturer under the Phase 3 program. For these
reasons, EPA is proposing to retain the current production-based
criteria for determining who is a small-volume engine manufacturer and,
as a result, eligible for the Phase 3 flexibilities described below
(see Sec.  1054.801).
    Based on confidential sales data provided to EPA by engine
manufacturers, the 10,000 unit cut-off for engine manufacturers would
include all of the small business engine manufacturers currently
identified using SBA's employee-based definition. To ensure all small
businesses have access to the flexibilities described below, EPA is
also proposing to allow engine manufacturers which exceed the
production cut-off level noted above but have fewer than 1,000
employees to request treatment as a small-volume engine manufacturer
(see Sec.  1054.635). In such a case, the manufacturer would need to
provide information to EPA demonstrating that the manufacturer has

fewer employees than the 1,000 cut-off level.
    If a small-volume engine manufacturer grows over time and exceeds
the production volume limit of 10,000 nonhandheld engines per year, the
engine manufacturer would no longer be eligible for the small volume
flexibilities. However, because some of the flexibilities described
below provide manufacturers with the ability to avoid certain testing
such as durability testing or production line testing, it may be
difficult for a manufacturer to fully comply with all of the testing
requirements immediately upon losing its small-volume status. In such
cases, EPA is proposing that the engine manufacturer would be able to
contact EPA and request additional time, subject to EPA approval, to
meet the testing requirements that generally apply to engine
manufacturers.
(a) Assigned Deterioration Factors
    We are proposing that small-volume engine manufacturers may rely on
an assigned deterioration factor to demonstrate compliance with the
standards for the purposes of certification rather than doing service
accumulation and additional testing to measure deteriorated emission
levels at the end of the regulatory useful life (see Sec.  1054.240).
EPA is not proposing actual levels for the assigned deterioration
factors with this proposal. EPA intends to analyze emissions
deterioration information that becomes available over the next few
years to determine what deterioration factors would be appropriate for
nonhandheld engines. This is likely to include deterioration data for
engines certified to comply with California ARB's Tier 3 standards and
engines certified early to EPA's Phase 3 standards. Prior to the
implementation date for the Phase 3 standards, EPA will provide
guidance to engine manufacturers specifying the levels of the assigned
deterioration factors for small-volume engine manufacturers.
(b) Exemption From Production-Line Testing
    We are proposing that small-volume engine manufacturers would be
exempt from the production-line testing requirements (see Sec.
1054.301). While we are proposing to exempt small-volume engine
manufacturers from production line testing, we believe requiring
limited production-line testing could be beneficial to implement the
ongoing obligation to ensure that production engines are complying with
the standards. Therefore, we request comment on the alternative of
applying limited production-line testing to small-volume engine
manufacturers with a requirement to test one production engine per
year.
(c) Additional Lead Time
    We are proposing that small-volume engine manufacturers could delay
implementation of the Phase 3 exhaust emission standards for two years
(see Sec.  1054.145). Small-volume engine manufacturers would be
required to comply with the Phase 3 exhaust emission standards
beginning in model year 2014 for Class I engines and model year 2013
for Class II engines. Under this approach, manufacturers would be able
to apply this delay to all of their nonhandheld engines or to just a
portion of their production. For those engine families that are
certified to meet the Phase 3 standards prior to these delayed dates by
selecting an FEL at or below the Phase 3 standards, small volume engine
manufacturers could generate early Phase 3 credits (as discussed in
Section V.C.3) through the 2013 model year for Class I engines and
through the 2012 model years for Class II engines. This option provides
more lead time for small-volume engine manufacturers to redesign their
products. They would also be able to learn from some of the hurdles
overcome by larger manufacturers.
(d) Broad Engine Families
    We are also proposing that small-volume engine manufacturers may
use a broader definition of engine family for certification purposes.
Under the existing engine family criteria specified in the regulations,
manufacturers group their various engine lines into engine families
that have similar design characteristics including the combustion
cycle, cooling system, cylinder configuration, number of cylinders,
engine class, valve location, fuel type, aftertreatment design, and
useful life category. We are proposing to allow small-volume engine
manufacturers to group all of their Small SI engines into a single
engine family for certification by engine class and useful life
category, subject to good engineering judgment (see Sec.  1054.230).
(e) Hardship Provisions
    We are also proposing two types of hardship provisions for
nonhandheld engine manufacturers consistent with the Panel
recommendations. The first type of hardship is an unusual circumstances
hardship which would be available to all businesses, regardless of
size. The second type of hardship is an economic hardship provision
which would be available to small businesses only. Sections VIII.C.8
and VIII.C.9 provide a description of the proposed hardship provisions
that would apply to nonhandheld engine manufacturers.
(3) Proposed Burden Reduction Approaches for Small-Volume Nonhandheld
Equipment Manufacturers
    We are proposing three provisions for small-volume nonhandheld
equipment manufacturers. The purpose of these provisions is to reduce
the burden on companies for which fixed costs cannot be distributed
over large sales volumes. We are offering these provisions because
equipment manufacturers may need more lead time to redesign their
equipment to accommodate the new Phase 3 engine designs. We request
comment on the appropriateness of the flexibilities described below.
    Under EPA's current Phase 2 regulations, EPA provided a number of
lead time provisions for small-volume equipment manufacturers. For the
Phase 2 regulations, the criteria for determining if a company was a
``small-volume equipment manufacturer'' was based on whether the
company produced fewer than 5,000 nonhandheld pieces of equipment per
year (excluding equipment sold in California that are subject to the
California ARB standards). For the same reasons noted above for engine
manufacturers, EPA is proposing to retain the current production-based
criteria for determining who is a small-volume equipment manufacturer
and, as a result, eligible for the Phase 3 flexibilities described
below (see Sec.  1054.801). The determination of which companies
qualify as small-volume equipment manufacturers for the purposes of the
flexibilities described below would be based on the annual U.S.-
directed production of nonhandheld equipment in each of the three years
from 2007 through 2009.
    Based on estimated sales data for equipment manufacturers, EPA
believes the 5,000 unit cut-off for equipment manufacturers would
include almost all of the small business equipment manufacturers using
SBA's employee-based definition. However to ensure all small businesses
have access to the flexibilities described below, EPA is also proposing
to allow equipment manufacturers which exceed the production cut-off
level noted above but have fewer than 500 employees for equipment
manufacturers, or 750 employees for construction equipment
manufacturers, or 1,000 employees for generator manufacturers, to
request treatment as a small-volume equipment manufacturer (see Sec.
1054.635). In such a case, the manufacturer would need to provide
information to EPA

demonstrating that the manufacturer has fewer employees than the
applicable employee cut-off level.
(a) Additional Lead Time
    As described in Section V.E.3., EPA is proposing a transition
program for all equipment manufacturers that produce Class II
equipment. Under that program, equipment manufacturers can install
Phase 2 engines in limited numbers of Class II equipment over the first
four years the Phase 3 standards apply (i.e., 2011 through 2014). The
number of equipment that can use Phase 2 engines is based on 30 percent
of an average annual production level of Class II equipment. To
implement this two-year extension for small-volume equipment
manufacturers within the context of the transition program for
equipment manufacturers, EPA is proposing that small-volume
manufacturers may use Phase 2 engines at a level of 200 percent of an
average annual production level of Class II equipment. Small-volume
equipment manufacturers could use these allowances over the four year
period of the transition program (see Sec.  1054.625). Therefore, a
small-volume equipment manufacturer could potentially use Phase 2
engines on all their Class II equipment for two years, consistent with
the SBAR Panel's recommendation, or they might, for example, sell half
their Class II equipment with Phase 2 engines for four years assuming
sales stay constant over time.
(b) Simplified Certification Procedure
    We are proposing a simplified engine certification procedure for
all equipment manufacturers, including small-volume equipment
manufacturers. See Section V.E.4 for further discussion of this
provision.
(c) Hardship Provisions
    Because nonhandheld equipment manufacturers in many cases depend on
engine manufacturers to supply certified engines in time to produce
complying equipment, we are also proposing a hardship provision for all
nonhandheld equipment manufacturers, regardless of size. The proposed
hardship would allow the manufacturer to request more time if they are
unable to obtain a certified engine and they are not at fault and would
face serious economic hardship without an extension (see Sec.
1068.255). Section VIII.C.10 provides a description of the proposed
hardship provision that would apply to nonhandheld equipment
manufacturers.

G. Technological Feasibility

(1) Level of Standards
    We are proposing new, more stringent exhaust HC+NOX
standards for Class I and II Small SI engines. We are also proposing a
new CO standard for Small SI engines used in marine generator
applications.
    In the 2005 model year manufacturers certified over 500 Class I and
II engine families to the Phase 2 standards using a variety of engine
designs and emission control technology. All Class I engines were
produced using carbureted air-fuel induction systems. A small number of
engines used catalyst-based emission control technology. Similarly,
Class II engines were predominately carbureted. A limited number of
these engines used catalyst technology, electronic engine controls and
fuel injection, or were water cooled. In both classes, several engine
families were certified at levels that would comply with the proposed
Phase 3 standards. Also, a number of families were very close to the
proposed emission standards. This suggests that, even accounting for
the relative increase in stringency associated with our proposed Phase
3 requirements, a number of families either will not need to do
anything or will require only modest reductions in their emission
performance to meet the proposed standards. However, many engine
families clearly will have to do more to improve their emissions
performance.
    Based on our own testing of advanced technology for these engines,
our engineering assessments, and statements from the affected industry,
we believe the proposed requirements will require many engine
manufacturers to adopt exhaust aftertreatment technology using
catalyst-based systems. Other likely changes include improved engine
designs and fuel delivery systems. Finally, adding electronic controls
or fuel injection systems may obviate the need for catalytic
aftertreatment for some engine families, with the most likely
candidates being multi-cylinder engine designs.
(2) Implementation Dates
    We are proposing HC+NOX exhaust emission standards of
10.0 g/kW-hr for Class I engines starting in the 2012 model year and
8.0 g/kW-hr for Class II engines starting in the 2011 model year. For
both classes of nonhandheld engines, we are proposing to maintain the
existing CO standard of 610 g/kW-hr. We expect manufacturers to meet
these standards by improving engine combustion and adding catalysts.
    For spark-ignition engines used in marine generators, we are
proposing a more stringent Phase 3 CO emission standard of 5.0 g/kW-hr.
This would apply equally to all sizes of engines subject to the Class I
and II Small SI standards, with implementation dates as described above
relative to Class I and Class II engines.
(3) Technological Approaches
    Our feasibility assessment began by evaluating the emissions
performance of current technology for Small SI engines and equipment.
These initial efforts focused on developing a baseline for emissions
and general engine performance so that we could assess the potential
for new emission standards for engines and equipment in this category.
This process involved laboratory and field evaluations of the current
engines and equipment. We reviewed engineering information and data on
existing engine designs and their emissions performance. Patents of
existing catalyst/muffler designs for Class I engines were also
reviewed. We engaged engine manufacturers and suppliers of emission
control-related engine components in discussions regarding recent and
expected advances in emissions performance beyond that required to
comply with the current Phase 2 standards. Finally, we purchased
catalyst/muffler units that were already in mass production by an
original equipment manufacturer for use on European walk-behind lawn
mowers and conducted engineering and chemical analyses on the design
and materials of those units.
    We used the information and experience gathered in the above effort
along with the previous catalyst design experience of our engineering
staff, to design and build prototype catalyst-based emission control
systems that were capable of effectively and safely achieving the
proposed Phase 3 requirement based on dynamometer and field testing. We
also used the information and the results of our engine testing to
assess the potential need for improvements to engine and fuel system
designs, and the selective use of electronic engine controls and fuel
injection on some engine types. A great deal of this effort was
conducted in association with our more exhaustive study regarding the
efficacy and safety of implementing advanced exhaust emission controls
on Small SI engines, as well as new evaporative requirements for these
engines. In other testing, we evaluated advanced emission controls on a
multi-cylinder Class II engine with electronic fuel injection. The
results of that study are also discussed in Section XII.

    In our test program to assess the feasibility of achieving the
proposed Phase 3 HC+NOX standard, we evaluated 15 Class I
engines of varying displacements and valve-train designs. Each of these
engines was equipped with a catalyst-based control system and all
achieved the applicable standard at the end of their regulatory useful
lives. Our work also suggests that manufacturers of Class I engines may
also need to improve the durability of their basic engine designs,
ignition systems, or fuel metering systems for some engines in order to
comply with the emission regulations.
    We tested five single-cylinder, overhead-valve Class II engines
with prototype catalyst/muffler control systems. Three of the engines
were carbureted and two were equipped with electronic engine and fuel
controls. This latter technology improves the management of air-fuel
mixtures and ignition spark timing. This itself can reduce engine-out
emissions relative to a carbureted system and also allows the use of
larger catalyst volumes and higher precious metal loading. Each of the
engines achieved the requisite emission limit for HC+NOX
(e.g., 8.0 g/kW-hr). Based on this work and information from one
manufacturer of emission controls, we believe that either a catalyst-
based system or electronic engine controls appear sufficient to meet
the standard. Nonetheless, some applications may require the use of
both technologies. Finally, similarly to Class I engines, we found that
manufacturers of Class II engines may also need to improve the
durability of their ignition systems or fuel metering systems for some
engines in order to comply with the emission regulations.
    Multi-cylinder Class II engines are very similar to their single-
cylinder counterparts regarding engine design and combustion
characteristics. There are no multi-cylinder Class I engines. Base on
these attributes and our testing of two twin-cylinder engines, we
conclude that the proposed Phase 3 HC+NOX standard is
technically feasible.
    Nonetheless, we also found that multi-cylinder engines may present
unique concern with the application of catalytic control technology
under atypical operation conditions. More specifically, the concern
relates to the potential consequences of combustion misfire or a
complete lack of combustion in one of the two or more cylinders when a
single catalyst/muffler design is used. A single muffler is typically
used in Class II applications. In a single-catalyst system, the
unburned fuel and air mixture from the malfunctioning cylinder would
combine with hot exhaust gases from the other, properly operating
cylinder. This condition would create high temperatures within the
muffler system as the unburned fuel and air charge from the misfiring
cylinder combusts within the exhaust system. This could potentially
destroy the catalyst.
    One solution is simply to have a separate catalyst/muffler for each
cylinder. Another solution is to employ electronic engine controls to
monitor ignition and put the engine into ``limp-mode'' until necessary
repairs are made. For engines using carburetors, this would effectively
require the addition of electronic controls. For engines employing
electronic fuel injection that may need to add a small catalyst, it
would require that the electronic controls incorporate ignition misfire
detection if they do not already utilize the inherent capabilities
within the engine management system.
    As described earlier, we also expect some engine families may use
electronic fuel injection to meet the proposed Phase 3 standard without
employing catalytic aftertreatment. Engine families that already use
these fuel metering systems and are reasonably close to complying with
the proposed requirement are likely to need only additional calibration
changes to the engine management system for compliance. In addition, we
expect that some engine families which currently use carbureted fuel
systems will convert directly to electronic fuel injection.
Manufacturers may adopt this strategy to couple achieving the standard
without a catalyst and realizing other advantages of using fuel
injection such as easier starting, more stable and reliable engine
operation, and reduced fuel consumption.
    Our evaluation of electronic fuel injection systems that could be
used to attain the proposed standard found that a rather simple, low-
cost system should be sufficient. We demonstrated this proof of concept
as part of the engine test program we conducted for our safety study.
In that program, we fitted two single-cylinder Class II engines with an
electronic control unit and fuel system components developed for Asian
motor-scooters and small-displacement motorcycles. The sensors for the
system were minimized to include a throttle position sensor, air charge
temperature sensor, oil temperature sensor, manifold absolute pressure
sensor, and a crankshaft position sensor. This is in contrast to the
original equipment manufacturer fuel injection systems currently used
in some equipment with two-cylinder Class II engine applications that
employ more sophisticated and expensive automotive-based components.
    Finally, there are a number of Class II engines that use gaseous
fuels (i.e., liquid propane gas or compressed natural gas). Based on
our engineering evaluation of current and likely emission control
technology for these engines, we conclude that there are no special
concerns relative to achieving the proposed Phase 3 HC+NOX
standard.
    Turning to the proposed Phase 3 CO standard for Class I and II
Small SI engines used in marine generator applications, these engines
have several rather unique design considerations that are relevant to
achieving the proposed CO standard. Marine generator engines are
designed to operate for very long periods. Manufacturers generally
design the engines to operate at lower loads to accommodate continuous
operation. Manufacturers also design them to take advantage of the
cooling available from the water in the lake or river where the boat is
operating (seawater). By routing seawater through the engine block, or
using a heat exchanger that transfers heat from the engine coolant to
the seawater, manufacturers are able to maintain engine temperatures as
well or better than automotive engines. Stable temperatures in the
engine block make a very significant difference in engine operation,
enabling much less distortion of the cylinders and a much more
consistent combustion event. These operating characteristics make it
possible to introduce advanced technology for controlling emissions.
Manufacturers also use this cooling water in a jacketing system around
the exhaust in order to minimize surface temperatures and reduce the
risk of fires on boats.
    The vast majority of gasoline marine generators are produced by two
engine manufacturers. Recently, these two manufacturers have announced
that they are converting their marine generator product lines to new
designs which can achieve more than a 99 percent reduction in CO
emissions. These manufacturers stated that this action is to reduce the
risk of CO poisoning and is a result of boat builder demand. These low
CO emission designs used closed-loop electronic fuel injection and
catalytic control. Both of these manufacturers have certified some low
CO engines and have expressed their intent to convert their full
product lines in the near future. These manufacturers also make use of
electronic controls to monitor catalyst function.

(4) Consideration of Regulatory Alternatives
    In developing the proposed emission standards, we considered what
was achievable with catalyst technology. Our technology assessment work
indicated that the proposed emission standards are feasible in the
context of provisions for establishing emission standards prescribed in
section 213 of the Clean Air Act. We also considered what could be
achieved with larger, more efficient catalysts and improved fuel
induction systems. In particular, Chapter 4 of the Draft RIA presents
data on Class I engines with more active catalysts and on Class II
engines with closed-loop control fuel injection systems in addition to
a catalyst. In both cases larger emission reductions were achieved.
    Based on this work we considered HC+NOX standards which
would have involved a 50 percent reduction for Class I engines and a
65-70 percent reduction for Class II engines. Chapter 11 of the Draft
RIA evaluates these alternatives, including an assessment of the
overall technology and costs of meeting more stringent standards. For
Class I engines a 50 percent reduction standard would require base
engine changes not necessarily involved with the standards we are
proposing and the use of a more active catalyst. For Class II engines
this would require the widespread use of closed loop control fuel
injection systems rather than carburetors, some additional engine
upgrades, and the use three-way catalysts. We believe it is not
appropriate at this time to propose more stringent exhaust emission
standards for Small SI engines. Our key concern is lead time. More
stringent standards would require three to five years of lead time
beyond the 2011 model year start date we are proposing for the program.
We believe it would be more effective to implement the proposed Phase 3
standards to achieve near-term emission reductions needed to reduce
ozone precursor emissions and to minimize growth in the Small SI
exhaust emissions inventory in the post 2010 time frame. More efficient
catalysts, engine improvements, and closed loop electronic fuel
injection could be the basis for more stringent Phase 4 emission
standards at some point in the future.
(5) Our Conclusions
    We believe the proposed Phase 3 exhaust emission standards for
nonhandheld Small SI engines will achieve significant emission
reductions. Manufacturers will likely meet the proposed standards with
a mix of three-way catalysts packaged in the mufflers and fuel-
injection systems. Test data using readily available technologies have
demonstrated the feasibility of achieving the proposed emission levels.
    As discussed in Section X, we do not believe the proposed standards
would have negative effects on energy, noise, or safety and may lead to
some positive effects.

VI. Evaporative Emissions

A. Overview

    Evaporative emissions refer to hydrocarbons released into the
atmosphere when gasoline or other volatile fuels escape from a fuel
system. The primary source of evaporative emissions from nonroad
gasoline engines and equipment is known as permeation, which occurs
when fuel penetrates the material used in the fuel system and reaches
the ambient air. This is especially common through rubber and plastic
fuel-system components such as fuel lines and fuel tanks. Diurnal
emissions are another important source of evaporative emissions.
Diurnal emissions occur as the fuel heats up due to increases in
ambient temperature. As the fuel heats, liquid fuel evaporates into the
vapor space inside the tank. In a sealed tank, these vapors would
increase the pressure inside the tank; however, most tanks are vented
to prevent this pressure buildup. The evaporating fuel therefore drives
vapors out of the tank into the atmosphere. Diffusion emissions occur
when vapor escapes the fuel tank through an opening as a result of
random molecular motion, independent of changing temperature. Running
loss emissions are similar to diurnal emissions except that vapors
escape the fuel tank as a result of heating from the engine or some
other source of heat during operation rather than from normal daily
temperature changes. Refueling losses are vapors that are displaced
from the fuel tank to the atmosphere when someone fills a fuel tank.
Refueling spitback is the spattering of liquid fuel droplets coming out
of the filler neck during a refueling event. Spillage is fuel that is
spilled while refueling. Regulatory provisions to set standards for
several of these types of evaporative emissions effectively define the
terms for establishing the specific test procedures for measuring
emissions. See the proposed regulatory text for more information.
    This proposal is part of a larger effort to control evaporative
emissions from all mobile sources. Motor vehicles have stringent
evaporative emission controls based on SHED testing of complete
vehicles.\82\ As a result, motor vehicle manufacturers must control
diurnal emissions, permeation through all fuel-system components,
running loss emissions, refueling vapor displacement, refueling
spitback, and to some extent, spillage. We recently established
evaporative emission standards for recreational vehicles and Large SI
engines (67 FR 68242, November 8, 2002). These standards include
permeation requirements for fuel tanks and fuel lines. In addition,
equipment using Large SI engines must control diurnal emissions and
running losses. Fuel systems used with Small SI engines and Marine SI
engines are not yet subject to evaporative emission standards.
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    \82\ An entire vehicle is placed in a SHED (Sealed Housing for
Evaporative Determination) and total evaporative emissions are
measured over prescribed test cycles.