Factors Affecting Capital Retirement: Evidence from Capacity Decommissioning Plans in a Publicly Owned Corporation

Abstract

THIS paper examines the determinants of short-term variations in the aggregate of capital retirement, drawing upon information from the capacity decommissioning programmes in a publicly owned corporation. It demonstrates that, in the short run, planned retirement varies in a way which is systematically related to changes in financial pressure, to excesses or shortages of capital stock anticipated for the short-term future, and to investment cycles. The study adds to existing evidence on capital retirement behaviour from an ex ante or planning perspective. Tests performed employ primary data on plans and expectations as explicitly formed by the firm at the time of taking retirement decisions. Concentration on changing expectations and targets set during successive retirement programmes has the advantage of providing a better indication about the forces which motivate closure decisions within the firm. By contrast, an ex post approach may lose part of this potential because additional factors may intervene between plans and realizations. The ex ante framework enables us explicitly to treat forward time-horizons for regularly revised expectations and, thus, to highlight some of the intertemporal aspects of retirement behaviour. The discussion builds on an account of the capacity decommissioning programmes of the Central Electricity Generating Board, a UK publicly owned corporation which is required by statute to generate and transmit electricity in England and Wales. The case of a nationalized industry requires special treatment of the variables involved, particularly financial pressure, since this is transmitted through the 'approving' public authorities rather than through market discipline. The treatment of capital retirement has been simplified in most studies in the literature. A large number of econometric studies of investment behaviour (Jorgenson, etc.) assume a priori that 'replacement investment' is equal to capital deterioration and that deterioration is equal to a constant proportion of the current capital stock. The proportional model of replacement invest-