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Enron Mail |
-----Original Message----- From: djcustomclips@djinteractive.com [mailto:djcustomclips@djinteractive.com] Sent: Tuesday, September 18, 2001 10:43 PM To: 168842@mailman.enron.com Subject: Rahil Jafry: Transportation as a commodity. Transportation as a commodity. By BILL HENSEL JR. 09/10/2001 JoC Week Copyright ©2001. The Journal of Commerce Inc. All Rights Reserved. Enron Corp., the Houston-based energy giant, is familiar with commodity markets. In addition to energy, the business for which it is best known, Enron is the world's largest metals trader. The company also understands transportation. It ships products as diverse as coal, steel, forest products and project cargo. Now Enron is proposing to change the face of over-the-road trucking and domestic intermodal services, by treating them as a commodity that can be bought and sold like any other product. The company's Enron Freight Markets unit promises to help shippers and carriers manage risks associated with fluctuating diesel fuel prices and other shipping costs. Enron will quote a set rate for dock-to-dock moves, and guarantee the service promised in the contract. Enron Freight Markets was created in March to develop a market for freight capacity and to buy and sell spot and forward capacity in transportation. As in other futures markets such as soybeans or pork bellies, a buyer of a contract would have the option of taking delivery of the service or closing out his position. Enron has successfully used similar formulas to create markets in energy. Can it do the same with trucking and intermodal freight capacity? Barry Par-ker, a consultant for BDP1 Consulting Ltd., which specializes in freight economics, said it could work but that transportation isn't like other markets. "The marketplace needs these things, but transportation marketplaces are not really receptive to them," Parker said. "I applaud what they are doing, but it is an uphill battle." Enron took a first step up that hill this year with its acquisition of Webmodal, a firm that provides domestic intermodal technology and logistics services for carriers, shippers and service providers. The former Webmodal office in Chicago houses Enron Freight's 24-hour customer service and operations center. This summer, Enron took another step, by acquiring trucking capacity for up to two years with major trucking companies. Enron said it recently signed its first firm sales contract with a major shipper, but declined to identify it. Dan Reck, vice president of Enron Freight Markets, said the company can offer shippers and carriers performance obligation terms that are considerably different from any others. "What Enron Freight Markets is trying to do is commercialize the risk management products for the freight market," Reck said. A key to the service is standardization of general contractual terms and conditions. The standardized areas would include specific delivery times, and specific consequences for non-performance. Fixed-price contracts act to stabilize fuel surcharges, spikes in shipping volumes and fluctuating carrier rates. Enron said it can do that not only because it has deep pockets to make the market liquid, but also by using its technology to evaluate optimal routing and modes and by having customers sign long-term contracts. "What ends up happening is that the obligations of both parties be-comes much more clean and predictable," Reck said. "So from a carrier's perspective, they can really count on a revenue stream from this piece of their business. There are very clean operational parameters. We are also trying to have shippers sign on with us under those same terms and conditions." Enron has a reputation as an innovator in its approach to the natural gas and electric-power markets, and is trying to change the way other markets, such as steel, are structured. EFM sees transportation as another commodity with a price that can be the basis of hedging or speculation. "We are kind of commodity-agnostic," Reck explained. "We don't care what the commodity is, we just sell capacity." Enron's approach differs significantly from others that have entered the trucking field as technology-based intermediaries. NTE, the former National Transportation Exchange, puts buyers and sellers directly together, while Logistics.com uses the contracting process to identify the most cost-effective matches between shippers and carriers. Unlike the online services, Enron contracts directly with the party involved and does not wait for two to be matched up on its website. Under Enron's ideal contract, damages for non-performance are spelled out explicitly as part of its belief that for the market to work buyers must be able to bank on the reliability of the contract. For example, suppose a carrier has accepted a contract price of $1.20 per mile for a shipment of freight between Atlanta and Chicago. If Enron does not provide the carrier with a load and the next best alternative the carrier can find is 70 cents per mile, Enron pays the difference. The same process would work in reverse. If the carrier promised to provide a truck and didn't, Enron would provide a replacement at a higher price and the trucker would have to make up the difference. Reck said the standardized contract would not be dictated by Enron but would evolve through negotiations or public forums. Efforts are under way to introduce the company to shippers, carriers and other intermediaries. Enron officials say they've talked with 400 to 500 shippers since March. One goal is to persuade an independent group - such as a trucking association or committee of marketplace participants - to sponsor a forum for negotiations, which the company believes would add legitimacy. In its first contract, Enron is acting as a carrier, since the shipper already was working with a third-party logistics provider. Enron considers itself distinct from 3PLs. It focuses on dock-to-dock moves and leaves supply-chain optimization to others. Its aim is to allow parties to minimize risk, for example by giving shippers the ability to hedge against the possibility of diesel pass-through fees. Enron is an extensive user of the Internet, however, and last year launched EnronOnline for traders to trade natural gas, oil, electricity and various other commodities online. No one expects Enron's new freight capacity product to capture immediate acceptance. Even Enron acknowledges that acceptance will be slow. Reck said it will take time to overcome cultural resistance to change in the freight industry, and that Enron is prepared for that. "We have done that in every market we have gotten into," Reck said. "What we find is the economic benefits of doing business this way overpowers resistance over time. You have to show what the benefits are." JOCO0000. © Copyright 2001, The Journal of Commerce Inc. All Rights Reserved. http://www.joc.com. Folder Name: Rahil Jafry Relevance Score on Scale of 100: 79 ______________________________________________________________________ To review or revise your folder, visit http://www.djinteractive.com or contact Dow Jones Customer Service by e-mail at custom.news@bis.dowjones.com or by phone at 800-369-7466. (Outside the U.S. and Canada, call 609-452-1511 or contact your local sales representative.) ______________________________________________________________________ Copyright © 2001 Dow Jones & Company, Inc. All Rights Reserved
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