Allowance of an acquisition adjustment provides for the difference between depreciated original cost and a purchase price. Pennsylvania explicitly allows acquisition adjustments for small and/or troubled systems, subject to certain conditions, and other states will allow such adjustments for these types of systems. Such policies should be recognized as a "best practice" for the water industry, but should be extended to include acquisitions that involve entities that may not be small or non-viable. Texas and California are examples of states where this can occur. A basic "best practices" principle could be stated as follows:
"If and to the extent a business combination produces identifiable savings, service improvements or other benefits to customers, shareholders should have the opportunity to recover and earn a return on the investment required to produce those benefits."
In this concept, the difference between depreciated original cost and a fair market purchase price represents the investment necessary to produce benefits and would be treated similarly to other investments the utility makes to provide cost effective, reliable service. Methods to achieve this goal could include acquisition adjustments to ratebase or the ability of the utility to retain quantified savings resulting from the combination equivalent to a return of and on the investment necessary to produce the savings.
This PDF is a 50-state survey regarding the practice of individual commissions when it comes to rate recognition of acquisition adjustments.