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Sent: Tuesday, September 18, 2001 10:43 PM
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Subject: Rahil Jafry: Transportation as a commodity.


Transportation as a commodity.
By BILL HENSEL JR.

09/10/2001
JoC Week
Copyright (c)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.

(c) Copyright 2001, The Journal of Commerce Inc. All Rights Reserved.

http://www.joc.com.



Folder Name: Rahil Jafry
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