Car Hire The Hidden

ExpenseACACSO – Tempe, AZ

November 12, 2010

Lynn Brown

LB Rail Consultant, Inc.

2

Agenda

Hidden Expense ?? What is Car Hire and how does it apply to my carrier Car Service Rules/Car Hire Rules Car Hire Payments and LCS Deprescription Time/Rate Claims Reclaim Process / Verification of Reclaim - Counters Counter to Counter Reclaim Process Transfer of Liability (TOL) Railroad Clearing House (RCH) and Car Hire Settlement Terms, Acronyms and Forms

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The Hidden Expense

Education and Understanding Rules

Accounting Issues Process Delay in computing the expense on a monthly basis

Operating Process Customer Interaction

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What is Car Hire?

Rent that an equipment user pays to the equipment owner for use of their equipment. Payment of car hire is intended to encourage efficient utilization of equipment when it is in the control of another Railroad. Depending on the type of equipment, car hire can include hourly (per diem), mileage and/or appurtenance components.

Cost of equipment and Maintenance Car Hire is due and payable 24/7, 365 days a year.

Payment records CHDX

Hours and Rates LCS and CHARM

Car Hire is not to be suppressed

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Do I, as a carrier, have to pay car hire? Regulations and Rules

OT-10 Circular Subscribing Railroad Car Service Rules Car Hire Rules The Official Railway Equipment Register

Car Hire Definition Equipment user pays the equipment owner for the use

of their equipment

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Car Service Rules and Car Hire Rules Car Service Rules

The Car Service Rules define how equipment is to be managed when on a railroad. As an example, the car service rules define interchange requirements, how to establish embargoes, when to reverse route cars, etc etc.

Car Hire Rules Car Hire rules were

established and published in the OT-10 to govern payments and receipt of monies exchanged for the use of Railroad equipment. The rules determine the obligation that an equipment user has for the payment for use of the equipment to the equipment owner.

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Car Service Rules

Rule 7 Interchange of Equipment

Rule 16 Assigned Equipment

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Car Hire Rules

Rule 2 Calculation of Hours and Mileage

Rule 3 Reporting Procedures and Record Retention

Payment Requirements

Rule 9 Liability Continuity System (LCS) Logic

Rule 11 Time/Rate Claims

Rule 13 and 14 Time Limits for Processing and Deduction of Reclaims

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LCS and Car Hire Settlement

Liability Continuity System (LCS) Was developed to create the official interchange

record for car hire settlement. LCS analyzes event date to establish continuity,

identifies illogical or missing interchange records and creates valid default records or corrects the erroneous records Based on Industry approved logic

Liability for car hire payable is based on the logic of the LCS program Payments, reclaims, TOL based on LCS

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LIABILITY CONTINUITY SYSTEM (LCS) FLOW CHART

Delivering Carrier

Receiving Carrier

AAR - RAILINCLiability Continuity

System - LCS

EquipOwner

Delivering Carrier

Receiving Carrier

Time of Liability Transfer

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LCS Logic

Verified Interchange – Both carriers report interchange time within the same interchange hour

Matched Interchange – Both carriers report interchange time but there is a difference in the interchange hour by at least one, but not more than 4 hours. Delivery hour is used.

Matched Interchange – Both carriers report interchange time, however there is a difference of more than 4 hours. LCS interchange time is the result of dividing the time difference by two.

Unmatched Interchange Delivery/Receipt – When only one interchange record is received, LCS interchange time is based on the interchange record received, either the delivery or the receipt record.

One Road Interchange – Based on agreement between the carriers, one carrier’s interchange times are always used, either delivery or receipt.

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LCS Logic – GAP Record

Interchange record created by LCS because of missing interchange records No interchange records have been received by either carrier Continuity was established on both carriers but no interchange,

ID or IR, was received by Railinc Continuity is established when three records, not interchange, are

received by Railinc LCS creates interchange based on default logic

Liability for car hire is transferred between the carriers based on the gap logic

Correction of erroneous payments based on GAP records are handled manually between the two carriers

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Car Hire Payment

Interchange time of equipment sent to Railinc LCS Logic Process - official interchange or transfer of

car hire liability Forward official interchange time to delivery and

receiving carrier and equipment owner Respective Carriers determine car hire payable

Based on the LCS interchange times Based on hourly and mileage rates from CHARM

Submit data, through the use of CHDX to Railinc, for settlement with car owners

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Car Hire Payments

Car Hire Payments

Interchange of Equipment -

Delivery & Receipts

Report to Railinc - Interchange Reportings

LCS Logic to determine

liability

Official time of liability sent to

respective Carriers

Car Accounting

Process

Car Hire Rates thru CHARM

Special Provisions for Car Hire Rates

Total Car Hire is determined that is

payable

Prior Adjustment - 2 Months

Submitted thru the AAR Data

Exchange Program

Equipment Owner

Receives Data

Payment is Made thru CH Process

Claims Process

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Deprescription

Market-oriented approach to setting car hire rates Implementation was effective January 1, 2003 Relies on negotiations between owners and users to negotiate rates

Past practice was a prescribed formula set by the STB Hourly and mileage rates are applicable on RR marked cars

Different rates between different parties based on value of equipment RAIL-CARDS

RAIL Car Accounting Rate Distribution System Central computer system to facilitate car hire negotiations and record

rate agreements in the CHARM files. Must use RAIL-CARDS system in order to be recorded in the CHARM

file. Prescribed Cars

Grandfathered box cars, Private-marked cars, and appurtenances Market Rate Cars

Any car other than prescribed cars

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Deprescription

Agreement Types – Rates Default rate

Assigned to all market rate cars Established based on the previous quarter’s lowest negotiated rate for the type of equipment

Market Rate Cars Market Rate

Agreement with no specified conditions Spot Market Rate

Agreement for a specific period of time Special Market Rate

Agreement that contains special considerations or provisions Prescribed Cars

Bilateral Agreement with no specified conditions

Spot Bilateral Agreement for a specific period of time

Special Bilateral Agreement that contains special considerations or provisions

Effective dates and Expiration dates Date to be activated and added to the CHARM file

Date is always the first day of the month of the activation Expiration is the last day of the month prior to the effective date if no date is noted

If date is noted, it must be the last day of the month of expiration

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Time/Rate Claims

Claims are invoices issued by the car owner to the car user where the car owner has not been paid in full for the use of its equipment.

Claims can be issued for a shortage in hours, miles and for payment of car hire at an improper rate.

Claims can be issued after 3 months and within 5 months of the last day of the month the car hire was earned

Issued for amounts over $25.00 No time limits on resolution Claims have no connection to any reclaim rule or

provision

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Time/Rate Claims

Time and Rate Claims

Time Rate Claims Process - Car Owner

Payment Records from Carriers who

handled equipment

CHARM Rates - Monthly

LCS Records

Payment = Hours

Payment = Rate

Agree

End

Disagree

Claim Issued to Carrier

Agree Disagree

Payment Made to Owner of EquipAgree

Return Claim with Reason and

Documentation

Car Owner Reviews Reason

Decision

End

Disagree

Agree

Disagree

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Reclaim Process

Reclaims are specific conditions that allow the user of equipment to be reimbursed for car hire paid to the owner of the equipment

Industry Rules Rule 4, 7, 8, & 22 Time limits apply

Special Agreements Agreements between two carriers, a shipper and a carrier, or a car user

and the car owner No time limits unless specified in the respective agreements

Car hire must be recorded/paid to the car owner before any reclaim is valid Reclaim may net zero the payment if the reclaim is issued to the owner

of the equipment Car hire amount paid would be reimbursed to carrier submitting the

reclaim if the owner of the equipment is not the carrier receiving the reclaim

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Reclaim Process

Determine if equipment qualifies for a reclaim Industry Rule or Special Agreement

Industry Rule – does not need any written agreement Special Agreement – written signed agreement is required

Determine the amount of the reclaim to be submitted Limit on Hours

Submit data, through the CHDX process, to the appropriate carrier or owner

Payment of reclaims are electronic and paid upon remittance of the car hire report – Appendix H

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Reclaim Process Flow Chart

PAY Owner Car Hire

Paid

Reclaim Qualify

End

NO

Reclaim Process

YES

STOPNO

Car Svc

Rules

Spls Agm

YESNO

Reclaim Type

YES

Against the Owner of

Equip.

Rule 4, 7,8, or 22

Signed Agm

End

Code 400 or 425

YES

Against Carrier or

Owner

Submitted thru the AAR Data

Exchange Program

Receiving Carrier or Owner

Receives Data

Payment is Made thru CH Process

Verification Process

NO

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Reclaim Validation

A carrier receiving reclaims has the right to verify reclaims being submitted to them Includes all types of reclaims

Reclaims that are not honored by the carrier receiving the reclaims are noted as a Counter Reclaim

Payment of counter reclaims are electronic and paid upon remittance of the car hire report – Appendix H

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Verification Reclaims Flow Chart

Verification of Reclaims

Data forwarded by AAR Data

Exchange Program

Carrier or Owner Receives Data for

Reclaims

Deduction is Made thru CH Process

Review of Reclaims

Respective Carriers

Verication System

Reclaim is correct & accepted

End

Reclaim is Disputed

Counter Reclaim

Appendix NSubmitted thru the AAR Data

Exchange Program

Review of Counter

Reclaims

Submitting Carrier

Receives Data

Summary

Detail

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Car Hire Payment vs. Reclaims

Car Hire and Original Reclaims are related only for the purpose that car hire must be paid before a reclaim is valid

Both car hire and original reclaim payments and deductions are handled electronically and are payable on demand

Counter reclaims also are handled electronically and are payable on demand

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Counter to Counter Reclaim

When issuing carrier’s reclaim has been declined by receiving carrier, this is a counter to counter reclaim

Resolution of a counter to counter reclaim is a manual process between the two parties

Request for Payment – Appendix N Prepared by issuing carrier with documentation and details to

support reclaim Forwarded to the receiving carrier for review

Discussion between the two parties is done for resolution of the counter to the counter

Payment, if determined, is made through the car hire process – Appendix H One line adjustment

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Counter Reclaims Flow Chart

Counter Reclaims

Submitting Carrier Receives Data -

Paper, Electronically

Review of Counter Reclaims

Agree with Counter

EndDisagree with

CounterPrepare

Documentation

Contact Issuing Carrier

AgreeDisagree

Reimbursement Made

Payment made thru CH Process

Agree

Review reason for

disagreement

AgreeDisagree

Disagree

Agree

Decision End

Disagree

Manual Process

Review Again Agree

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Transfer of Liability - TOL

Established to allow a delivering carrier to transfer responsibility of car hire to a receiving carrier Car Hire Rules 5 and 15

Rule 5 – Switching Car Hire Expense Recovery Maximum of 120 hours Reciprocal customers Reported electronically to Railinc/Time limits for reporting

Within 30 days from the date that switching service is complete Failure to report within the time limits will forfeit any TOL

Rule 15 – Cars Not Accepted When Offered When interchange can not be accomplished to the receiving road Reported electronically within a set procedure

Procedure must be followed or no TOL will be made Rule is final

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Car Hire Settlement and Railroad Clearing House (RCH) Car Hire Settlement

Based on the Appendix H submitted by the carriers to the owners of equipment Includes both payment for equipment and any reclaims or

adjustments Owners of equipment can also submit Appendix H to carriers

Counter to Reclaims Reported within one (1) month and ten (10) days from the last

day of the month in which it is earned Payments are due and payable upon the receipt of the car

hire reports (Appendix H) When two Appendix H’s are received from both the carrier and the

owner, the amounts will be handled in a netting position Amounts owed handled by various methods

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Car Hire Settlement and Railroad Clearing House (RCH) What is the Railroad Clearing House (RCH)?

Central agency to administer and transfer funds between participating carriers Administered by the Railinc Corporate Services Division Designed to handle fund transfers between carriers

Interline Freight Settlement Car Hire

Start July 2008 Earned Month Car Repair Billing Interline Switching Settlements (ISS)

137 roads participate Funds are immediately available Reduces the number of transactions Eliminate declined drafts Offsets allowed

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Car Hire Settlement and Railroad Clearing House (RCH) How will RCH work for Car Hire settlement?

Car Hire Data Exchange (CHDX) information will be used for settlement Appendix H data will not be used for settlement

Single Sign On (SSO) Website Secure site to get information – CHDX and RCH

Monthly Settlement Process RCH Determines Net/Net Positions

Carriers notified on the 19th of the month or first business day thereafter Carriers required to wire funds by 11:30am on the 21st of the month

Central Bank - Wachovia Bank, N.A. and Bank of Montreal If carriers can not pay, there is a short settlement

Interest and penalties can be assessed Negative Payable Tolerance Table

Established limits of exposure for negative net/net amounts Established between the respective carriers and car owners Counter to reclaims are one factor for a negative payable amount

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Car Hire Settlement and Railroad Clearing House (RCH) Negative Payable Tolerance Table

Initially set dollar limit to zero Increase dollar value to acceptable amount

Based on experience, history of any negative activity and the carriers acceptable risk tolerance levels

Allows negative car hire amounts to be included in the net/net process up to the limit set by the carrier Allows for the system to work Settlement arrangements can be made outside RCH with agreement of both parties

If negative payable report to carriers exceeds the amount set, settlement will be handled manually

Amounts are by individual carriers and can be modified or changed monthly Changes to be made before the 11th of the month due for processing

Why? Counter to a reclaim submitted Deductions on car hire previously deducted in error

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Railroad Clearing House (RCH) Process

RCH Process

Car Hire Data ExchangeProcess Railinc

CHDX Tapes/FTP

CHDX Web

Merged CHDX Records

Monthly Settlement

Process

RCH Process to determine

net/net position

RCH provides Debtor/Creditor

Position

Debtor Carriers Funds to

Central Bank

Central Bank

Process

Net/Net Position to Central Bank

Bank funds transfer to Owners & Carriers

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RCH Benefits No differences between Appendix H reports and CHDX

More timely and complete settlement of car hire Process simplification Eliminates the need to balance Appendix H with CHDX details

Reduction of transaction and labor costs Settlement takes place on a set date with RCH sending

money to companies in a receivable position Treasury functions benefits Shortens the settlement window and eliminates reported

car hire going to a past due status Companies in a receivable position will get their payments

quicker Participants in the CHDX that are not participating in

RCH will be subject to a $5.00 per cycle processing fee.

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Terms

Appendix H – Summary of Amounts due for Car Hire of Freight Cars, Trailers and Related Costs – one page summary furnished by each car hire payable carrier

Appendix N – Details of Amounts due for Car Hire. Also, Request For Payment

Bi-lateral Agreements – Agreement between two parties that can be applied to specific cars, location with some type of terms

Car Hire – Rent that an equipment users pays to the equipment owner for the use of their equipment.

Car Hire Data Exchange (CHDX) – monthly exchange of time and mileage payment information. Data can be downloaded from the Internet, sent via electronic tape or on paper.

Car Hire Rules – Rules determine the obligation that an equipment user has for the use of the equipment to the equipment owner.

Car Owner – The owner of a car is considered to be the entity that has been assigned, by the AAR, the reporting mark that is stenciled on the car.

Car Service Rules – Rules define how equipment is to managed when on a railroad.

Car Hire Accounting Rate Master (CHARM) – Official source of car hire rates for all equipment registered in UMLER.

Claims – Invoices issued by the car owner to the car user where the car owner has not been paid in full for the use of its equipment.

Circular OT-10 – Operating Transportation (OT) circular 10 covers the rules surrounding the Code of Car Service Rule/Code of Car Hire Rules.

Deprescription – Used to describe how car hire rates are set. Also used to refer to the entire body of rules that govern car hire, etc.

Earned Month – Term used to identify which month car hire earning are associated with. Also, Service Month.

Electronic Data Interchange (EDI) – The process of exchanging data electronically via a communications network in a pre-defined standardized format.

Foreign Car – Any car not belonging to the particular railway on which it is running.

Interchange – The exchange of equipment between two railroads at a specific junction point shared by both roads.

Hourly Rate – Payments made to equipment owners for the use of the equipment based on a hourly rate or per diem.

Interline – Moves of traffic involving more that one carrier.

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Terms

Interline Settlement System (ISS) – Computer software running at a central site, Railinc, to process settlements between interline carriers.

Intermediate Line – A railroad handling a freight car from one railroad to another without loading or unloading the freight car and such road does not participate in the freight rate.

Liability Continuity System (LCS) – System to analyze event data to establish continuity.

Mileage Rate – Payments made to equipment owners for the use of the equipment based on a rate per mile.

Official Railway Equipment Register (The Yellow Book) – Provides the most detailed information available regarding equipment, ownership, junction points, etc.

Private Marked Equipment – Railroad equipment that is owned by an entity other that a railroad. Initials end in an ‘X’. (TTX Equipment is not considered a private marked equipment.)

Railinc – For Profit wholly-owned subsidiary of the AAR. An Information technology company whose mission is to be the provider of communication services to the transportation industry.

Reclaims – Specific conditions that allow you to be reimbursed car hire payment based on industry rules or special agreement.

Reported Month – Term used to define as the month that the activity is reported in. Also, Allowed Month.

Reporting Mark – Two to four alpha character assigned by Railinc to identify interchange equipment. Also identifies the entity which car hire receivable are report to.

Railroad Marked Equipment – All equipment that bears a reporting mark assigned by the AAR to a railroad.

System Car – A railroad freight car that is owned by the railroad that operates it.

Tele Rail Automated Information Network (TRAIN II) – Database which contains movement events, waybills, car hire transfer liability records on all rail equipment. Data supplied by railroads and equipment owners to Railinc, which then processes the information.

Transfer of Liability (TOL) – Established to allow a delivering carrier to transfer responsibility of car hire to a receiving carrier

TTX – Company that operates a national pool of flatcars, boxcars and gondolas.

Uniform Machine Language Equipment Register (UMLER) – Database of information , car specifications, about railroad and intermodal equipment.

Zero Rated – Car Hire rate that is equal to zero.

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Acronyms and Forms

AAR – Association of American Railroads ACACSO – Association of Car Accountants and Car Service Officers BFO – Best and Final Offer CHARM – Car Hire Accounting Rate Master CHDX – Car Hire Data Exchange CMA – Commercial Marketing Agreement EDI – Electronic Data Interchange FSAC – Freight Standard Accounting Code I/C – InterChange ISS – Interline Settlement System LCS – Liability Continuity System ORER – Official Railway Equipment Register RCH – Railroad Clearing House TOL – Transfer of Liability TRAIN – TeleRail Automated Information Network UMLER – Universal Machine Language Equipment Register Forms

Appendix H – Summary of Car Hire Appendix N – Summary of Reclaims

Detail of Reclaims

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FOR EQUIPMENT OF - MONTH OF FEB 2008

ITEM NAME (A) (B) (A) (B) TYPE DESC PAYMENT DEDUCTION NET CAR HIRE RULES1/11-1T/11T 010 CURRENT 01 FIRST ADJ. 02PRIOR 03REGISTRATION ADJUSTMENT 06PENALTY 01,02,03,06

APPURTENANCE 010CURRENT 01FIRST ADJ. 02PRIOR 03PENALTY 01,02,03

INTERMODAL 020CURRENT 01FIRST ADJ. 02PRIOR 03PENALTY 01,02,03

CAR HIRE OTHERCAR HIRE MISCELLANEOUS 024 ANYRULE 4 040 07,08,09RULE 5 050-055 07,08,09RULE 7 070 07,08,09RULE 8 080 07,08,09RULE 15 150-151 07,08,09RULE 16 160 07,08,09RULE 21 LOADING CHARGE 210-215 01,02,03RULE 22 221-225 07,08,09RULE 23 230 07,08,09

MISCELLANEOUSSPECIAL 400 07,08,09BILATERAL 425 07,08,09CONTRACTS 450 07,08,09RESERVED 500-550 07,08TRAILER RELIEF 600 07,08,09

NON CAR HIRE-OTHERCSR-5 800 XXXXXXXXSPECIAL USE CHARGE 810 XXXXXXXXORIGIN DETENTION 820 XXXXXXXXDESTINATION DETENTION 825 XXXXXXXXOT-5 850 07,08,09TAX 860

GRAND TOTALS XXX XXXXXXXX

** EDI TOTALS -$ -$ -$ ** NON-EDI TOTALS -$ -$ -$

ABC RAILROAD

ACCOUNT

FREIGHT CARS, TRAILERS AND RELATED COSTS SUMMARY OF AMOUNTS DUE FOR CAR HIRE

Example ofAppendix H –

Car Hire Summary Report

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PERIOD COVERED: April 2008 ABC RAILROAD PROCESSING DATE: 08/08/08 PAGE NO: 1

TO:--XXRR -- XX RAILROAD FILE NO: ABC -200806-A001

STATEMENT COVERING TYPE OF RECLAIM AS INDICATED:

( ) RULE 4 ( ) RULE 7 ( ) RULE 15 ( ) RULE 22 ( ) SPECIAL ( ) COUNTER

( ) RULE 5 ( ) RULE 8 ( ) RULE 16 ( ) RULE 23 ( ) OTHER ( ) CSR 5

( ) INTERMEDIATE ( ) SUPPLEMENT ( ) BILATERAL

STATEMENT FOR APRIL 2008SHOWING CARS HANDLED FOR YOUR ACCOUNT AT AMOUNTS TO:

-$ ACCOUNT OF TIME

-$ ACCOUNT OF MILEAGE

-$ ACCOUNT OF APPURTENANCE

-$ TOTAL AMOUNT ( ) REQUEST FOR PAYMENT - IN ACCORDANCE WITH CAR HIRE RULES 13, INCLUDE THESE AMOUNT IN THE PRESCIRBED CAR HIRE REPORT, QUOTING FILE NUMBER GIVEN ABOVE.

DETAIL FOR CARS IS ( ) ATTACHED OR ( ) ON AAR EXCHANGE TAPE ( ) DEDUCT - IN ACCORDANCE WITH CAR HIRE RULES 14, THESE AMOUNTS HAVE BEEN DEDUCTED FROM YOUR CAR HIRE REPORT FOR THE MONTH OF , 20

DETAIL FOR CARS IS ( ) ATTACHED OR ( ) ON AAR EXCHANGE TAPE ACKNOWLEDGEMENT NOT REQUIRED.

APPENDIX -N- TOTAL

MONTHLY CAR HIRE COUNTER RECLAIM SUMMARY

Example of Appendix N –

Statement of Reclaim

Note: Separation of the various categories of Payments includedOn Appendix N is mandatory. However, the specific format illustrated Is not mandatory, but is subject to individual road manual and computerPreparation preferences.

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RUN DATE : 08/08/08PAGE NO: 2

RULE NUMBER: XX FILE NO: ABC -200806-A001

CAR INFORMATION RTE TIME MILE APUR ---BEGIN--- ----END---- LD/ TTL TOTAL ( TIME + MILEAGE + APPURT = RECLAIM ) EARNED FWD CUSTOMERINIT NUMBER TYPE SRC RATE RATE RATE DATE HR DATE HR MTY HRS MILES AMOUNT AMOUNT AMOUNT AMOUNT DATE MTY NAME SP 516637 V941 O 0.52 0.12 4/05/08 19 4/6/2008 00 E 5 2.60$ 0.60$ 3.20$ Apr-08 REASON: Reclaim Overlaps with Another Reclaim or Bad Order

TTGX 964505 V973 U 0.75 0.12 4/18/08 20 4/20/08 08 E 36 27.00$ 4.32$ 31.32$ Apr-08 REASON: Reclaim Overlaps with Another Reclaim or Bad Order

=====> F ILE NO. TOTAL 41 29.60$ 4.92$ 34.52$ # OF CAR(S) = 2

LOCATION:

APPENDIX -N- DETAIL

ABC RAILROAD

MONTHLY CAR HIRE COUNTER RECLAIM REPORT

ALLOWED DATE: XXX/20XXFOREIGN ROAD: XXRR

Example of Appendix N –Detail of Reclaim

QUESTIONS ??

Lynn Brown – President

LB Rail Consultant, Inc.

801-631-8030