I heard that the system was used in the 70s and that shortlines made money off it. I’m curious of how it worked. As I understand it railroad A payed railroad B to use railroad B’s cars for hauling. How did it work?
The per diem system is still in place today! When cars are off the owners rails, the carrier on whose rails the car actually is acrews charges for the time the car is on that carriers rails…this has been a hourly charge for the past 30+ years. Since in reality, each carrier has cars of most all the other carriers on line at some point in time money only changes hands when the accounts are settled up (I believe) quarterly…only the net difference between carriers changes hands.
How the short lines that played the game made money, was that their cars were used in free runner service, where any carrier could load the car to any other carrier, and were almost never on the owning carriers property and thus acrewed per diem charges for all the time the car were off line.
Per diem as such only applies to railroad owned cars. Private owner (X) cars operate under a differing set of rules.
Thirty or so years ago, the system worked a bit differently. If a foreign car was on your railroad at midnight, you were charged the daily per diem rate for that car, payable to the owning road. Period. Regardless of whether it remained on your line for two hours or two weeks.#### The practical side of this arrangement meant that for every road seeking to interchange cars, midnight was the witching hour, and for the two hours or so leading up to midnight, you could expect the delivery of lots of cars in interchange. Both your cars offline to get them in per diem earning capacity, and foreign cars offline so your road wouldn’t get stuck with the charge for the next day. To say that this resulted in a clogging of lines and yards is to understate conditions. Bt skewing interchange hous, it played havoc with the capital tha
Geep,
You are probably hearing a mangled story about “Incentive per diem”.
The basic per diem, latin for per day, dates to shortly after railroads figured out it made more sense to interchange loaded cars than to unload at railroad A’s freight house, dray across town, and reload into B’s cars at B’s freighthouse. The carriers started out with two party agreements, but there were so many railroads that this system was too complex to manage and the industry went to industry wide reciproacal agreements sometime after the Civil War. Since all participants would be on both sides of any transaction, the industry wide rate per car was one that represented the daily capital cost of the car plus a mileage component intended to pay for wear and tear related to mileage. The system was designed to charge a fair rate. Since the rate was fair, no one had an incentive to supply either more or fewer cars than was necessary to protect their traffic.
In the begining the railroad suppled cars to its customers. With interchange and per diem the general practice was (and still is) that the origin road supplied the car for the shipper to load.
At some point the ICC decided that the carriers could somehow game the system. To prevent that the ICC regulated car hire rates, probably in the first decade of the 20th Century.
In the 1970’s the ICC became alarmed about the fact that the boxcar fleet was shrinking so they invented and imposed on the carriers “Incentive Per Diem”, or IPD. To encourage construction of certain favored types of boxcars the ICC mandated that the per diem rates be substantially higher than break even on new cars of those selected types.
Shortlines that had customers who used the favored cars found themselves in a position where the cars themselves became a profit center becuase IPD rates were set by regulatory fiat at higher than the actual cost of the car. Shortlines were part
**PNWRMNM, said: "…**One of the long standing car service rules was that empty cars should be returned to their owner. Once the IPD fleet moved into surplus, the Class I carriers returned the free runner cars to their short line owners. Some of the short lines did not have enough track to store the cars and the IPD short lines and the doctors and dentists found out that this was not such a fun game. After a long while even the ICC decided that their experiment with over market rates was a failure. Unfortunately they then decided on “deprescription”, but that is another fiasco for another time.
Mac McCulloch
The term " Deprescripton" was one I had never heard before: So I went looking for information!
I found some information on the following link:
https://www.railinc.com/rportal/web/guest/deprescription
FTL"…Deprescription is the process used by railroads to negotiate car hire rates for the use of equipment…"
FTL:“… Each Monday, the AAR publishes the weekly broadcast list, which lists cars entering or exiting the deprescription system, during the prior seven days. Along with the car mark and number, AAR equipment type code, and default rates, each record contains an indicator identifying which type of activity is occurring…”
And then this last. FTL:"…This activity is related to either a car first entering the Umler system, or a car that has been deleted from the Umler system…"
Hopefully, Mac [PNWRMNM] or some one else can explain this. I think I understand but I’ve been wrong before.[:'(]
Thanks!
Sam,
Short version is they made a simple and predictable system for determining car hire rate that was based on the value of the car, complicated and unpredictable.
I doubt that there are more than couple of dozen people who really understand the current system and I will not attempt to explain it because I am not one of them. If you really care, go back to the source you cited are read “Deprescription Business Rules”. Have fun. I did not.
Mac
The Incentive Per Diem System was a fiasco.
It grew out of a so-called boxcar shortage. There weren’t enough available boxcars to meet the shippers’ demand for boxcars. There is one and only one reason for a such a “shortage”. The prices charged to the shippers were too low. It’s obvious from the existance of the so-called “shortage” that the railroads could not economically justify the acquisition of boxcars to move freight at the regulated rates mandated by the ICC. (It was actually worse than that. Not only couldn’t the railroads justify acquiring new boxcars, they couldn’t justify repairing existing cars. In spite of the “shortage” 10s of thousands of boxcars sat bad order for years. The railroads couldn’t spend money to repair a piece of equipment that would loose money if operated.)
The only real solution was to let the rates for boxcar movement adjust upward. But that would be a market based solution and we couldn’t have that. So the ICC came up with this Incentive Per Diem system.
Basically, IPD allowed any railroad that had more boxcars in service than it had on a specific past date to charge a higher per diem rate for their use. And away we went. Shortlines that previously didn’t have a boxcar to their name built up fleets of thousands of such cars. These got out on to the rail system and further agrevated the financial decline of the rail industry. The major railroads were still hauling the freight at a loss, but that loss was increased because they had to pay the higher per diem rates to the short lines (and those investors.) The problem wasn’t solved, just agrevated.
When the inevitable recession hit there were no loads for these cars and they were sent home to the short lines. The investors lost a lot of money. Boxcars that never saw a load had been built. An entire factory at Cartersville, GA was put up to build these th
Thanks,Mac!
Will check out the recommendation:
Deprescription Business Rules.
Also will let you know how I fare.
[EDIT/UPDATE:]
See what you mean, Mac. That is no easy read. I Slogged through the first 40 pages-One Time. It will take more than that just to get into the groove. 40 pages of the most convoluted language a poor person outside of the government can try to understand. One wonders how many different ways can something be stated and then restated in another manner?
I would bet that the individuals who authored that document have retired from Govt. service and are now consultants who will interpret what is stated in the document–for a price?
Anyway, I’ve now got a headache or my head is going to explode. Thanks, Mac![sigh]
PER DIEM RULES governing settlement for the use of interchanged freight cars, as adopted by the American Railway Association, April 24, 1902.
Definitions:
Home Car - A car on the road to which It belongs.
Foreign Car - A car on a road to which it does not belong.
Private Car - A car having other than railroad ownership.
Home - A location where a car is in the hands of its owner.
Home Road - The road which owns a car, or upon which the home of a private car is located.
Home Route - The line of intermediate roads over which a foreign car was moved from home.
Home Junction - A junction with the home road.
Home Route Junction - A junction on the home route.
Switching Service - The movement of a car at a charge for the service rendered; the road performing such service not participating in the freight rate.
RULES.
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The rate for the use of freight cars shall be 20 cents per car per day, which shall be paid for every calendar day, and shall be known as the per diem rate.
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Days shall be reckoned by subtracting the date of receipt from the date of delivery. A road which receives and delivers a car on the same day shall not pay the per diem for that day.
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A road shall have the right to demand the return of its car after it has been twenty days consecutively on any road. If the car is held by that road more than ten days after the date of such notice, making thirty days in all, thereafter a penalty rate of 80 cents per day in addition to the per diem rate shall be paid by such road for the further use of that car.
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All railroads, including ferry lines, shall be responsible to the car owner for amounts accruing for the use of a car at the established rates, whether such car is in road service or switching service, until the car has been delivered to the owner or to another road.
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An arbitrary amount for each car in switching service may be reclaimed by the switching line from the road f
Railroads have long paid other railroads when they use the other railroad’s cars. and they still do. In the olden days, they paid by the day, hence the term “per diem”. With more modern information systems, the payments came to be based on a combination of miles and hours, but the “per diem” term still stuck long after “per day” payments had passend into history.
The main difference between the 70’s and now is how the charges are calculated. Prior to the 1970’s, the rates were based on a formula developed by AAR and its predecessors. In response to compaints that the rates were too low, the ICC started “presecribing” the formula in the 70’s, and the ICC formula was biased towards kept the rates “high” in order to encourage car acquisition. The problem was that this system, when coupled with the system of interchanging equipment, made it very difficult for using railroads to refuse to use expensive cars (because, if the cars came to them in interchange under load, they had to handle themt), thus negating market forces which woudl otherwise have kept rates from getting too high. The system was particularly lucrative for short lines (or for car owners that lease the short line’s reporting marks) because they could keep the cars off their lines (and thus earning per diem) most of the time. A day of reckoning, of sorts, came when the supply of cars (particularly boxcars) became greater than the loads available for them. At this point, the empty cars started coming “home” to the owning railraod (or, more properly, to the railroad whose marks appeared on teh cars) - a disaster for a short line that had acquired the cars (or leased its marks) for per diem earnings rather than to protect their loadings.
I forget the exact year, but I believe it was in the early 1990’s that the ICC “deprescribed” per diem rates (now more commonly, and more accurately, referred to as “car hire”). The new system is still pre
WHOOPS. For some reason, when I wrote my noteof a few minutes ago, I couldn’t see the other notes on this thread which had already answered the question. The joys of computers.
Three other financial reasons for non-railroads to have owned the newer cars back then were availability of capital to acquire them, the Investment Tax Credit, and depreciation (perhaps accelerated as well) - the latter 2 sometimes referred to as 'tax shelters". In brief:
- Since many railroads were struggling financially, it was hard for them to find or justify the funds or good enough credit to acquire the cars themselves, so outside parties stepped in to fill that need;
- ITC has value only if there are profits - and more importantly, significant amounts of income taxes on same - that the ITC can be used against to directly reduce those taxes, “dollar for dollar”. Again, most railroads didnt have high profit levels, so they couldn’t use the ITC themselves. But a big profitable leasing compnay could take advantage of the ITC;
- Depreciation is similar as a deductible expense, except that it is further up in the income and expense statement and so has a less direct effect on the profit and tax calculations. Nevertheless, it’s still a benefit, but one that can’t be taken advantage of unless there are some amount of profit available to be ‘sheltered’ by it.
A better and more complete and correct explanation could be forthcoming from someone here who is more qualified in these matters than I am, and is invited.
- Paul North.
I worked for the MILW at the time incentive per diem went into effect. In fact I was one of the witnesses at the ICC hearings.
The ICC had all sorts of wondeful studies that showed the decline of the unequipped box car fleet. It seems as though the studies never took into account the changes in commodity movement - they never admiitted that now grain primarily moved in covered hoppers and much manunufactured goods and lcl moved in piggyback trailers.
However, in the long run, I think it was a good idea to raise the “per diem” rates to something much closer to real capital costs (although at the time my testemony opposed it - the MILW needed ties not box cars). The railroads quickly learned how to move freight cars. Empty cars both home and foreign now had a “real” value ( the operating department didn’t worry about empties -“they didn’t cost anything”). The number of moves a car made per year soon went from 12 or so to around 30.
The short run effect was some of the most expensive box cars you ever saw - every peice of jewelry that you could think of was hung on those cars. At the prices those cars cost, you can bet we learned fast how to home road them fast.
As an interesting side at this time, I got involved in reviewing a lease for some cars at the same time the son of our Assistant Chief Mechanical Officer (he was a dentist, I think)was thinking of investing in an equipment lease. We figured out that we were looking at the same lease at the same time from both sides. After figuring out how much the middle man hustler was making, neither one of us went forward on the package.
Dave Young
As Paul describes above, it was at one time common for those individuals/entities with a lot of capital and high taxable income, to enter into arrangements with those (like struggling companies and municipalities, for example), who needed capital and got little benefit from any tax advantages (such as accelerated depreciation and tax credits). These arrangements allowed cheaper financing – cheaper because the “financier” did not need as high a return on their on-going investment, since they got so much (in the way of tax benefits) up front.
Some called this mutually-advantageous creative financing, others called it a tax shelter for the rich.
Either way, both the underlying economics and the tax laws have changed over the years, making such “deals” much rarer – or infinitely more complex – these days.
Are private cars subject to certain accounting rules? Looking at tariffs, it is obvious there is a financial incentive for a company (let’s say a large grain processor) to own their equipment. Rates are lower for private owned cars. The ability to have a steady supply of cars is also critical.
Is there a per mile charge (or something similar) which the railroads pay back to the owners of the cars? It seems as if I have seen that somewhere, just cannot put my finger on it.
Also, what about the return movement of the cars? What kind of charge, if any, is there on that. Let’s say the grain processor has inbound loads of corn to their plant. They pay $1000 for the freight. Now, the empty car needs to return (somewhere) for another load. It must move 250 miles to be placed for loading. Is there a charge for that movement?
What about movements of unit trains of ethanol running from Iowa to the east coast. Does the rate charged include the empty return of the tank cars? My guess is that it does and this is a little different as it seems to be a regular unit train movement. But, loose carloads would be different, particularly for tank cars (of chemicals).
ed
This is OT to some extent. I recall Congressional hearings about boxcar shortages that were actually not shortages at all – but whatever the merits or demerits of the IPD situation, it resulted in a lot of new boxcars which are now reaching or have reached the end of their useful lives. Modern railroading places far less emphasis on loose car railroading and boxcars then was the case decades ago, but the fact remains that there are still plenty of freight trains that have plenty of now-elderly boxcars in them, and I wonder what comes next when the IPD-era cars finally are off the rails.
Dave Nelson