I think he sells single and three phase units and that may have been the wrong picture. The 240v AVR arrived today and after installation and testing, I think I figured out what happened, just not the technical why. It seems that the 120V AVR was on one leg. When I was testing, that leg had slightly more load. The voltage dropped, causing the AVR to raise the current (is that how it works). That raised the voltage more on the other leg, and seeming to self balance by lowering the voltage on the heavy side, the AVR leg drooped. That caused the AVR to boost more........ etc.
I decided with Tom's advice to try loading the heck out of the generator tonight for about 2-3 hours after installing the new unit. I was pulling (according to the kill-a-watt) 1700 watts on one leg and 1250 on the other. Voltages were more even with the 1700W side about 115 V and the 1250W side about 122 V. Gentle black puffs of smoke from the exhaust, but chugging away fine. This is the first major continuous load this high as the engine only has about 5 hours on it now. Near 3KW seems great to me as the engine isn't broken in yet, and I'm at about 4500 feet.
I think I'm beginning to see the possible negatives to an AVR system. Time will tell if I keep it inline, or pull it and install a simple rheostat.