Recent selling is a result of a confluence of events, many focused on the ongoing saga in California. With the shift of power in the U.S. Senate increasing the rhetoric regarding electricity price caps, the stocks of independent power producers felt the pressure. Despite President Bush's vow to fight any attempt to regulate power prices and the Federal Energy Regulatory Commission -- or FERC, the regulatory body with sole authority to order such caps -- rejecting pleas from California to regulate wholesale prices, concern persists that some compromise still might result in some type of pricing restrictions in California.

The FERC last week instituted a new regulatory scheme limiting the price charged for power in California during periods of intense demand. Although the plan's effectiveness has been questioned by state regulators, some analysts fear regulators might consider additional action if the power producers continue to post record profits.

However, at least for now, the FERC has a core group of commissioners on record against broad price caps, and favoring so-called "circuit breakers" to ease temporary pricing pressure. With two new Bush appointees joining the FERC, it isn't likely outspoken Commissioner William Massey could muster the votes to implement more rigorous price caps.

California Gov. Gray Davis has said he will sue the FERC, seeking court-ordered price caps. And, while a federal court in California already has rejected arguments similar to Davis', the intensified rhetoric -- combined with Davis' continued attempts to villify the generators as "pirates" and "price-gougers," has given investors reason to lock in profits generated since the first of the year.

Credit Concerns at Calpine

One of Davis' favorite phrases lately involves the word "haircut," as in "the generators are all going to get a haircut," suggesting the independent power producers that have sold power to California but have not been paid will never receive all the money they are owed. Davis has proposed the generators accept 70 cents for every dollar of receivables, a plan that has generally been greeted with ice-cold empathy from the generators.

Most of the generators have offset their receivables with reserves, yet Calpine has chosen not to, arguing that its contracts almost assure priority payment from the utilities currently in default. Calpine has more than $250 million in outstanding receivables with Pacific Gas & Electric, a unit of PG&E Corp. (PCG:NYSE - news - boards). While Calpine is unique in that all of its power was sold to Pacific Gas & Electric under long-term contracts, Calpine has yet to be paid. With Pacific Gas & Electric in bankruptcy, the likelihood of full payment is uncertain.

Pacific Gas & Electric either has to decide to affirm or reject the contracts. Affirmation would mean payment arrangements would be made through the bankruptcy court. Rejecting the contracts would leave Calpine free to sell the power on the open market, but the past-due payments might be harder to come by.

One analyst says it is likely Pacific Gas & Electric will agree to accept the contracts and make payments. "PG&E is strongly incentivized to affirm the contracts because they are priced at below-market rates," noted Credit Suisse First Boston power analyst Neil Stein. He rates Calpine strong buy with a $90, 12-month price target. His firm has provided banking services for the company.

Other Left-Coast Pressures

In addition to price caps and credit issues, a number of pending matters in the Golden State may be giving IPP investors pause. Pending legislation would impose a 100% windfall profits tax on generation sold above a price to be determined by the California Public Utilities Commission, or CPUC. Prices bandied about in discussions have ranged from a low of $50 to about $100 per megawatt hour. And, while passage remains uncertain and surviving a court challenge is even more problematic, the uncertainty of pending legislation is putting the generator stocks on ice.

Of course, the continued rhetoric from Davis -- supported by recent legislation -- suggesting California still might consider seizing power plants through eminent domain hasn't helped matters. However, it isn't likely that many investors take such a threat seriously. The state would have to compensate current owners for the plants and likely couldn't muster the funds to do so, even if such a strategy were anything but rhetorical flourish.

Lower Prices and Bad Press

A final concern among investors might be that both natural gas and power prices across the country, including California, have dropped from the stratosphere, causing some to worry that current earnings projections aren't sustainable. However, the earnings projections of companies like NRG, Reliant and Mirant assume prices more closely aligned with current levels. Hence, the risk of earnings disappointments this year or next seem minimal.

In addition, a PBS "Frontline" special on the current energy crisis, which will air tonight, is widely anticipated to paint the current state of deregulation and the power generators in a bad light. And, Dietert, for one, believes the recent selloff could extend into the next couple of weeks if other news organizations ride the "Frontline" coattails.

Part of the Solution

In the end, however, the generators and their new generation projects hold the key to current power shortages in California and elsewhere. And, for Davis and other heavy-handed pols to think they can regulate their way out of current shortages is short-sighted.

Though the spring run in many of these stocks was fast and furious, the recent sell-off is based on fears that aren't completely rational. Ultimately, there will be a solution to the California crisis and the continued development of new power generation will benefit the companies that have the foresight and determination to forge ahead, the independent power producers. Simply, Davis can't solve the problem without them.