Jackie Singer CN System Manager – Business Process Optimization Rule 4 Initiative Jackie Singer CN System Manager – Business Process Optimization Hi. I am here today to talk to you about the opportunity to centralize Rule 4 reclaims at Railinc. This idea came about when talking to others at CN about what could be the next step to centralizing the car hire process, now that we had done Rule 7 and Rule 8. Someone mentioned that we send Railinc all sorts of information, and why don’t they do something with it? That got us thinking about Rule 4, and what information is needed to decide if a road is entitled to relief. But before we get to that, I would like to get back to basics, and talk about what a Rule 4 reclaim is and when it should be used.

Rule 4 Reclaims Definition Car Hire Rule 4 allows reclaim for car hire costs incurred while empty cars are under revenue billing. The purpose of Rule 4 is to allow relief from car hire for equipment moving as a revenue empty. The relief is given because the freight rate for the empty revenue move does not take car hire rates into account. In addition, the road moving the car cannot load it, and therefore cannot generate additional revenue. Finally, as the car owner directed this car to be moved, they are not entitled to car hire. There are several reasons for reclaiming Rule 4: Cars forwarded to a contract shop for re-stencilling, scrapping or refurbishing New cars leaving a manufacturing plant Cars leaving a contract shop and Repositioning at owner request An important point is that per the Car Hire Rules, the rule 4 portion of the move must be paid and then reclaimed. The road moving the car cannot just short pay the time owed.

Current Steps in Rule 4 Process Identify revenue empty shipments Identify associated car hire costs Create reclaims Audit payable reclaims Resolve disputes There are several steps in handling Rule 4 reclaims. Some may be automated within each roads internal systems, and some roads may be handling these manually. The first step is to identify that an empty revenue move has occurred. To do this, you need the STCC as well as to check your revenue management system for a revenue waybill. Next, you need to identify the start and stop date and hour, as well as the locations. Third, you need to create the segment to be generated on the CHDX. You also need to audit Rule 4 reclaims on your equipment to ensure they are valid. To do this, you need to determine if a revenue empty move occurred at the request of your road. If you cannot determine this, you will counter the Rule 4. All of the above require effort from both the car owner and the car user. It is a process open to errors as well as to disputes.

Current Process Map Railinc sends EDI417 to participating carriers Customer sends EDI404 Originating Carrier sends EDI417 Carrier 1 Carrier 2 Car Accounting staff determine if a revenue empty move occurred This is a simplified diagram of the current process. A customer sends an EDI404 bill of lading to the originating carrier. The originating carrier then sends an EDI417 movement waybill to Railinc. Railinc forwards the EDI417 to all carriers participating in the movement of the equipment. A couple of months later, the Car Accounting staff of all participating carriers will look at this move to determine if it was a revenue empty. If yes, they will each create a Rule 4 reclaim against the car owner. The car owner will audit the Rule 4 records to determine if they are valid. If determined to be invalid, the car owner will counter. The fact that these processes are completely distinct from each other leaves room for erroneous Rule 4 reclaims, missed reclaims, and disputes between carriers. These processes are interrelated, and should be treated that way. That way, we can ensure that the process is followed thru from beginning to end: a revenue empty waybill results in car hire relief under Rule 4. Send Rule 4 segment on CHDX Rule 4 audited by Car Owner Create Rule 4 Manual intervention required

Future Vision Replace existing carrier processes for creating reclaims under the provisions of Car Hire Rule 4 with a centralized, automatic process at Railinc. The future vision of an automated Rule 4 process is to allow the data sent to Railinc to determine whether or not car hire relief is applicable. Individual carriers and the industry would realize benefits through reduced costs if Rule 4 reclaims were processed centrally. In addition to the reduced costs, the centralization of Rule 4 reclaims would move the industry another step toward fully centralizing car hire accounting functions.

Information Needed to Determine Rule 4 The following will determine if there is a revenue empty move: STCC Revenue waybill Empty movement records The following information is required to create a Rule 4 LCS record: Car Initial and Number Start Date and Hour of Movement End Date and Hour of Movement Equipment Owner Car Hire Liable Carrier Start Location End Location Part of the information needed for Railinc to determine Rule 4 is contained in the EDI417. This information is the STCC, whether the move is revenue or nonrevenue and which carriers are involved. The other part of the information needed is contained in the movement records we send to Railinc. This information contains the Load/Empty status, the locations and the dates and times related to the move. Railinc already receives this information from all carriers. So basically, Railinc has all the necessary information to calculate Rule 4 begin and end times. This would allow Railinc to create an LCS type record to start and stop liability, by putting the car back in the owners account. Railinc has all the necessary information to determine Rule 4

Future Process Map Customer sends EDI404 Originating Carrier sends EDI417 Railinc sends EDI417 to other carriers Carrier 1 Carrier 2 Create LCS Rule 4 record Yes Railinc determines if the move is a revenue empty Here is a simplified view of what the future process would look like. As before, the customer will send the EDI404 to the originating carrier. The originating carrier will send the EDI417 to Railinc, and Railinc will forward it to all affected parties. At the same time, Railinc could flag this move as a potential revenue empty, based on the STCC and the revenue flag on the 417. Once the car is moving and is confirmed to be empty based on the movement records generated by the roads, Railinc could produce the Rule 4 LCS records to start and stop liability. This would be similar to the Rule 7 and Rule 8 LCS records. Again, I am oversimplifying the process, but in short this is how it would work. Stop No

Benefits Reduce manual intervention required by Railroads Reduce disputes, counter reclaims and associated workload Erroneous reclaims will not be processed Valid reclaims not currently generated will be processed There are several benefits to an automated, centralized process. First it would reduce the manual intervention required by each railroad and equipment owner. The equipment user would not have to track the revenue empties, and the equipment owner would not have to audit the Rule 4 reclaims on their equipment. Second, it would reduce counter reclaims. Much like the Rule 7 and Rule 8 processes have been mostly eliminated by DDCT, this automation would centralize the determination of Rule 4. Therefore, disputes should be virtually eliminated. Next, erroneous reclaims would not be generated. All criteria would need to be fulfilled before car hire relief would be granted. At the same time, Rule 4 reclaims that would have potentially been missed will be captured, ensuring car hire relief is granted whenever appropriate.

Potential Barriers Local traffic waybill information not currently sent to Railinc Traffic determined to be a revenue empty internally, after Railinc processing Industry agreement to processing standards There are some potential barriers to automating the Rule 4 process that would need to be overcome. First, speaking for CN, we do not send local traffic 417s to Railinc. I am sure most other roads do not either. There is currently no reason to, as Railinc does not need to forward the information to any other carriers. We as an industry would need to start sending local traffic 417s to Railinc for them to be able to process Rule 4 car hire relief on local traffic. The second potential barrier is traffic determined to be a revenue empty move internally, after Railinc processing. I think that this would represent a very small percentage of moves, especially once we have all agreed to the criteria as an industry. It would also encourage accurate and timely reporting, knowing that the car hire relief is dependent on this information. Which brings me to the last potential barrier. We, as an industry, would need to agree to the criteria Railinc would use. After watching the Rule 7 and Rule 8 automation thru DDCT, I have no doubt we could handle Rule 4.

Conclusion Potential to reduce or eliminate some manual processes Potential for the industry to come to an agreement on Rule 4 criteria Next step to centralizing Car Hire processes at Railinc, after Rule 7 and Rule 8 In conclusion, the barriers could be overcome by working together as an industry. We could move towards a centralized, automated Rule 4 process at Railinc. We could reduce or eliminate the various manual process involved in determining and auditing Rule 4 reclaims. We could come together to agree on a specific set of criteria, which would reduce any disputes between carriers and equipment owners. And finally, it would be another step towards centralizing the car hire processes at Railinc. Thank you for your time. Any questions?

Questions?