Railcar Repair Fraud

United Industries LLC, a subsidiary of Caterpillar’s Progress Rail Services unit was fined $5 million plus $20 million in restitution for intentionally cheating customers with un-necessary repairs and dump-ing rail car parts in the ocean. As reported Thursday, December 7th by the Wall Street Journal, a guilty plea was entered for unnecessary repairs to three companies, TTX, Green-brier and Pacer International. The illegal activity occurred in 2008 and 2009 in Long Beach.

The problem at the Port of Long Beach is an extreme example of billing abuses. But it does show what happens when the intent of the rules is lost.

Investigators found that United Industries supervisors encouraged employees to damage components including gouging wheels and smashing brake parts to increase revenues. Divers were used to recover discarded parts in the Port of Long beach. Railcar repair abuses aren’t anything new. Unfortunately, we are seeing more as the in-tent of the repair rules are being lost. As an old car toad, we were brought up with the concept the rules in the AAR Field Manual were not to be taken verbatim, but more on the in-tent. The “old heads” at-tempted to teach that just be-cause the wording of a rule may be interpreted one way, the intent was to ensure the safe operation of the railcar.

For example, there is a rule requires replacement of the coupler if “cracks” are found in the area behind the coupler horn are “2 inches in length, or additive. . . if more than one crack” (AAR Rule 16.A.1.c.(2)). This is an area were hairline surface defects sometimes occur during the casting process and are not “cracks”. Railroads will rarely replace a coupler for this defect, especially on a car/coupler that is many years old. On the other hand, outside re-pair shops condemn couplers for these hairline surface defects. Of course, the outside repair shop will pull out the rule book on point out that the rule requires replacement. And yes, they are correct based on the wording of the rule, but is that the intent? Of course not. The rule is to remove couplers that are defective. If a surface flaw has operated for 16+ years without a problem, it is very hard to say the coupler is defective. Another significant rule change as resulted in huge repair in-creases to car owners.

The intent of the AAR rules address repairs to the “running gear” wheelsets, brakes, couplers, etc. In other words, components required to allow safe operation for the railcar. Few rules allow repairs to lading equipment, doors, hatches, gates, etc. except to facilitate unloading and some very limited loading. These are typically considered to be at the discretion of the car owner.

There were two additions to AAR Rule 1 that has opened car owners to significant in-creases in car ownership costs. The first permits repair up to 16 hours “for protection of lad-ing…” (AAR Rule 1.2.a.(5)). The second specifically targets boxcars. It permits repairs to door and door hardware “not to exceed 8 hours” (AAR Rule 1.2.b.(1). That is almost 24 hours (over $3,000) without the owner’s knowledge or prior authorization. Plus, there are no restrictions on material charges. In many cases, doors are replaced at an additional cost, again without the car owner’s knowledge or prior authorization. All allowed under the AAR rules and will pass any audit test.

I attended a seminar where boxcar shippers were complementing the industry about the improvement in the quality of equipment that are receiving. Having operated a large box-car fleet for many years, I was surprised. Knowing the age of the boxcar fleet and general condition of the standard box-car, I was very surprised!. I was surprised, until I saw how it is being achieved. We found one repair had an outside re-pair shop operating on the rail-road to make boxcars suitable for loading as permitted per Rule 1. This repair operation employed over 200 people, with two rip tracks and a fleet of mobile trucks in the yard. They will probably repair over 50,000 cars in 2017. I applaud the railroads for taking steps to improve the quality of equipment to their customers. It is a win for the shipper and win for the railroads to recapture business from trucks. But it is false economy. The benefits accrue to the railroad and shipper, but the costs are borne of the car owner without means of compensation.

These are just a couple of examples of how the repair industry is increasing railcar cost of ownership. The AAR Field Manual gives railroads and re-pair practitioners lots of opportunities to generate significant revenue. Again, as an old car toad; we were taught to use the Golden Rule in the repair of railcars. I know it’s very naive for me to think there aren’t abuses, both big and small; but it doesn’t make it OK. The problem at the Port of Long Beach is an extreme ex-ample of billing abuses. But it does show what happens when the intent of the rules is lost. As railcar cost of owner-ship rise due to abusive billing practices, investment in new railcars will decline.

If you suspect you are being targeted for these types of re-pair abuses, please contact us for further assistance.

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