Ok I started looking at the encoder input "chain" and here is what I have found:
The Z axis encoder is Heidenhan ROD type. It is connected to a terminal strip at the encoder and then a 4 pair cable brings the signals down into the control cabinet.
The cable has shielding but it is not being used.
The signal is then ran into a box that has a line driver (digital amp) for each axis, and also brings in the 5VDC from the Computer power supply for the encoder(s) and the digital amp circuits.
The signal then comes out of the box and is fed into the motion card in the PC, again with unshielded cable (I believe that it is twisted pair (4) wire)
I do not know how old this setup is but, I am wondering if the problem could be with the Digital amp on the Z axis feed ???
I also do not like that there is no signal shielding, I would like to fix that as well.
Anybody think I may be on the right track ??