Bond Requirements for Nonroad Spark-Ignition Engines

Bond Requirements for
Nonroad Spark-Ignition Engines
October 8, 2008, the Environmental Protection Agency (EPA)
Opublished regulations adopting new exhaust emissions
standards
for nonroad spark-ignition engines, also known as Small SI
engines
(73 FR 59034). As part of these regulations, EPA has adopted a
bond
requirement for manufacturers that are subject to these new
regulations.
Why is EPA requiring a bond for Small SI engine manufacturers?
Before a manufacturer can introduce an engine into commerce in the
United States,
they must irst apply for a Certiicate of Conformity (certiicate)
from EPA. The cer-
tiication process requires manufacturers to demonstrate that
engines and equipment
meet applicable emission standards. Once a manufacturer has
received a certiicate,
several important obligations apply to the certifying manufacturer
or importer. For
example, we require ongoing testing of production engines, as well
as reporting of
recurring defects. Manufacturers may need to pay penalties if there
is a violation and
may need to perform a recall if their products are
noncompliant.
For manufacturers operating within the United States, we are
generally able to com-
municate clearly and insist on compliance. Depending on the
circumstances, we may
meet with speciic manufacturer representatives, halt production, or
seize assets. For
manufacturers without staff or assets in the United States, these
alternatives are not
available. Our limited ability to enforce requirements or to
recover appropriate pen-
alties increases the risk of environmental problems as well as
problems for consumers.
This creates the potential for a manufacturer to gain a competitive
advantage if they
do not have substantial assets or operations in the United States.
We have learned
from several recent enforcement cases that there is an increasing
number of manufac-
turers selling certiied engines in the United States without
committing the necessary
resources to meet their in-use and long-term obligations.
Warranty is an example of a potential compliance obligation that
manufacturers
commit to when they receive a certiicate from EPA. Regulations
require that
Ofice of Transportation and Air Quality
EPA-420-F-09-0027
May 2009
engine manufacturers must service warranty claims for
emission-related defects that occur during
the prescribed warranty period. We have experience with
manufacturers that did not have the
resources to make warranty repairs if necessary. Such manufacturers
beneit from being able to
legally sell their product in the United States without bearing the
full range of associated obliga-
tions.
To address this concern, we adopted a requirement for manufacturers
of certiied engines to meet
bond requirements to cover the cost of any potential compliance or
enforcement actions under
the Clean Air Act.
When does the bond requirement take effect? ??


This requirement was adopted in regulations that were published on
October 8, 2008, at 40
CFR 1054.690 (73 FR 59034). Starting with the 2010 model year, < br /> applications for certiication
must include information related to the bond, including a
commitment to secure a bond if that
is required for the manufacturer. Starting January 1, 2010 , all
Small SI engines that are subject
to the bond requirement must have the bond in place before
introducing 2010 and later model
year engines into US commerce. US Customs and Border Protection
in particular will be
looking for documentation related to required bonds starting in
2010.

Does the bond requirement apply to all manufacturers?
The bond provisions apply to all manufacturers that certify and
sell Small SI engines in the
United States. This includes domestic and foreign producers of
engines. In the case of imported
products, this also includes equipment manufacturers and importers
that import products con-
taining engines certiied by another manufacturer.
The regulation includes provisions that allow certain manufacturers
or importers to waive the
bond requirements in certain circumstances. To be exempt from the < br /> bond requirements, a manu-
facturer would need to meet both the asset test and the
repair-network test. Note that equip-
ment manufacturers and importers may meet the bond requirements or
obtain waivers of the
bond requirements in conjunction with the certifying engine
manufacturer. For example, if the
certifying engine manufacturer passes the asset test and the
repair-network test, or has met the
bond requirements, all equipment manufacturers and importers that
import those engines will
be considered to be in compliance with the bond provisions in the
regulations.
The bond requirements apply with respect to engines that are
subject to exhaust emission stan-
dards ; they do not apply separately for fuel-system components or
any other products relative to
evaporative emission standards.
What is the asset test for waiving bond requirements?

The asset test is based on the understanding that manufacturers
with substantial long-term as-
sets in the United States are more likely able to meet any
compliance-or enforcement-related
obligations. We have therefore adopted provisions to allow for
waiving the bond requirements
for manufacturers that have ixed assets in the United States
meeting one of the following ap-
plicable thresholds:
?
$ 3 million – For manufacturers that have been certiicate holders in
each of the
preceding ten years without failing a test conducted by EPA
oficials or having
been found by EPA to be noncompliant under applicable
regulations. < br /> ?
$ 6 million – For secondary engine manufacturers. A secondary engine
manu
facturer is generally a certifying manufacturer that buys partially
complete
engines for inal assembly from another engine manufacturer.
?
$ 10 million – For manufacturers that do not qualify for the smaller
speciied bond
thresholds.

The value of long-term assets is based on the value from the
manufacturer most recent balance
sheet for buildings, land, and ixed equipment, after subtracting
depreciation and related long-
term liabilities (such as a mortgage) using Generally Accepted
Accounting Principals (GAAP)
or International Accounting Standards ( IAS).
What is the repair-network test for waiving bond requirements?
The biggest indicator of a manufacturer ability to make warranty
repairs is the presence of re-
pair facilities in the United States. The regulations specify that
manufacturers can demonstrate
a readiness to meet warranty obligations by maintaining an adequate
repair network. Such a re-< br /> pair 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.

Does the bond requirement apply to engines sold only in
California?
Yes.
If I need to meet the bond requirements, how do I determine the
value of the bond?
The value of the bond must be at least $ 500,000, though a higher
bond value may apply based
on multiplying the annual volume of shipments by a per-engine rate.
The per-engine bond val-
Per-engine Bond Values ??
For engines with displacement falling The per-engine bond value
is …
in the following ranges …
Disp. <225
cc
$ 25
225 cc
$ 50
740 cc
$ 100
Disp.> 1,000
cc
$ 200
The total bond amount will be based on the value of imported
products over a one-year period.
For example, for total projected US-directed production volumes
of 10,000 engines with 180
cc displacement and 10,000 engines with 400 cc displacement in a
given calendar year, the cal-
culated bond value is $ 750,000. This calculated value must be
adjusted as follows:
?
If estimated or actual US-directed production volume increases
beyond the
level appropriate for the currently held bond, the manufacturer
must increase the
value of the bond to relect the increased volume within 90
days.
?
You may not decrease the value of the bond.
?
The bond values (as well as the asset thresholds identiied above)
must be adjusted
for inlation based on the Consumer Price Index (CPI) published by
the Bureau
of Labor Statistics. For example, 2010 bond values ??are adjusted by
comparing

the CPI for June 2009 with the CPI for June 2008. Round calculated
values ??for
the thresholds and for total bond obligations to the nearest
thousand dollars.
?
For engines produced within the United States and shipped without
aftertreat-
ment devices under the delegated-assembly provisions of 40 CFR
1054.610, the
calculated bond value must increase by 20 percent.
The bond must remain in place for every year that a manufacturer or
importer is selling or im-
porting engines in the US Additionally, the bond must remain in
place for ive years after the
engine manufacturer no longer certiies Small SI engines (or after
the equipment manufacturer
or importer no longer imports Small SI engines).

What information must I include in my application for
certification?

The manufacturer must identify whether or not the bond requirement
applies. If the bond re-
quirement is waived, the manufacturer must provide basic
information to demonstrate that the
asset test and the repair-network test have been met. For example,
the applications must include
street addresses to identify the location of the relevant long-term
assets. If a bond is required,
the application must include an estimate of the value of the bond
and a commitment to meet
the bond requirement. It is not necessary to secure the bond before
we can issue a certiicate.
What is a surety agent?
A surety agent is a party that provides a surety bond, such as
those required to meet the bond
requirements for Small SI engines. This is somewhat like an
insurance company that is prepared
to underwrite a policy to ensure that the manufacturer required to
post a bond will be able to
meet its obligations under the regulations. A sample bond form is
attached to this fact sheet.
The Surety