The short answer is that it has to do with glycogen, HPV and light reflection of different types of cells.
The long answer, from emedicine.com, is below. It's the clearest explanation
I found during my first two years of residency.
"Dilute acetic acid (3-5%) effectively removes the thin mucous covering of the epithelial surface. It further penetrates into the surface cell causing coagulation of intracellular proteins and dehydration of the intracellular compartment. These actions essentially make the cells more refractory toward light because the space between nuclei and their surrounding proteins for light energy to pass through is decreased. As a result, more light is reflected back toward its source, changing the perceived color of the area in view. Areas where light is more heavily reflected have an obvious whitish coloration and are described as acetowhite epithelium.
If light is shone on normal cervical epithelium after the application of dilute acetic acid, characteristic appearances can be noted. The cells of the stratified squamous epithelium are typically 20-30 cells in depth. The cells near the surface are flat and elongated, with very small nuclei. They have a large amount of glycogen in their cytoplasm. Acetic acid applied to this tissue has little effect on the physical state of the cells, and the solution cannot penetrate to the deeper cell layers where its effect would be more apparent. The appearance of this portion of the cervix when viewed under magnification is essentially unchanged from its appearance prior to the acetic acid application.
Most of the light still can easily pass through the surface cells, and only a minimal amount of light is reflected back. This tissue appears as a homogenous pinkish tan color. Blood vessels are not readily apparent in mature estrogen-primed tissues as they are beneath the 20- to 30-cell layer. When vessels are observed, they tend to be of small and diminishing caliber running parallel to the surface.
The normal columnar epithelium medial to the squamous tissue appears in sharp contrast. Because this tissue is only a single cell layer thick, light transmits easily through it even though the nuclear-to-cytoplasmic ratio is greater than in the surface squamous cells. Because the tissue is so thin, the underlying vasculature is in close proximity to the surface so light is heavily absorbed in the red spectrum of blood. This tissue therefore appears a bright red color because of minimal reflectance and maximum absorption in the red spectrum.
The process of metaplasia is always present to some degree at the squamocolumnar junction. The cells undergoing this metaplastic process are characterized by relatively large nuclei and proteinaceous cytoplasms. Application of an astringent agent such as acetic acid, with its above-referenced cellular effects, makes these cells denser and more reflective of light. With more light reflected back toward its source and less being absorbed, the tissues take on a whitish-grey appearance. This change appears filmy or thin through the colposcope because of the thinness of the metaplastic layer of cells.
Cells infected with certain types of HPV undergo morphologic changes that result in relatively large nuclei that are surrounded by viral proteins. Depending on viral type and duration of infection, these changes can eventually encompass the entire thickness of the maturing squamous epithelium. Following acetic acid priming, light that shines on these tissues penetrates poorly, with most being reflected back.
Therefore, tissues with extensive HPV involvement appear notably white compared with their surrounding tissues. HPV-infected cells can, in many cases, become significantly altered to the point of losing their normal structure and becoming dysplastic. As this progresses, the full thickness of the squamous epithelium becomes composed of larger, rounder cells with larger nuclei than is expected in normal tissue. Because of this nuclear density, which is further increased after acetic acid exposure, light is heavily reflected and minimally absorbed, again producing a white color compared to surrounding normal tissue."
emedicine.com article on Colposcopy
