Imagine a 1-million-sq-ft office park in a northern climate of 4,000 degree-days (DD), plus or minus 500 DD. Such a facility annually consumes (at $4.50/Mtbu) $400,000 of firm gas (yielding an average cost of $100/DD). The price of fuel bought under a tariff containing a fuel adjustment charge floats with the weather: a mild winter sees an average price below $4.50, and a very cold winter blows the budget.
To control its costs, this facility signed a fixed price fuel contract covering a winter up to 4,500 DD, with a floating price for fuel needed during colder weather. In Figure 1, the horizontal blue line is the fixed price while the red line is the utility price for the same volume of fuel. At 4,000 DD, the fixed and average utility prices are the same. At 3,500 DD, buying from the utility saves a dollar amount (relative to the fixed price) represented by triangle A. At 4,500 DD, the fixed price saves an amount seen in triangle B. Since the fixed price contract has a limited volume, however, the price for fuel used above 4,500 DD is the same for either option.