The federal government threatened to yank electricity licenses from four big energy companies, delivering the latest blow to an industry already hammered by accusations of questionable business practices.

The companies --

Avista

(AVA) - Get Report

,

El Paso Electric

(EE) - Get Report

, the Portland General Electric unit of

Enron

and the trading arm of

Williams

(WMB) - Get Report

-- risk losing their ability to set electricity rates in deregulated markets unless they take action within the next 10 days to supply requested information to the Federal Energy Regulatory Commission.

The companies' shares dropped sharply Wednesday morning as investors worried about the possible consequences of the unusual FERC remarks. The declines, ranging from 9% to 13%, come on top of a steep recent slide in share prices as investors increasingly question the industry's credibility and its business fundamentals.

Go West

FERC has accused the companies of failing to cooperate with its investigation of possible market manipulation in California by withholding crucial information about their Western trading practices. In an order issued late Tuesday, FERC said the companies are "hindering the commission's ability to determine whether the Western markets have been manipulated and, as a result, whether rates charged may have been unjust and unreasonable."

All four companies have expressed a willingness to comply with FERC's orders. Doing so could stave off the agency's first revocation ever of a power company's market-based rate authority.

Williams addressed FERC's questions, issuing a statement late Tuesday evening that denied it had purchased power from the California Power Exchange to sell in neighboring states at higher prices. Previously, Williams said it had yet to determine whether it had engaged in such a practice.¿

"Williams strongly disagrees with FERC's characterization of our response as uncooperative," said Bill Hobbs, president and chief executive of Williams' energy marketing and risk management business. "And threatening to take away our market-based rate authority is inappropriate.

"It always is, has been and will continue to be our intent to fully cooperate with the FERC."

In the last few months companies in the power sector have seen their market values plunge as regulators continue to probe the business dealings and accounting practices of the industry. Meanwhile the debt-ratings agencies have threatened to downgrade the companies' debt amid worries about whether the power-trading business actually deserves an investment-grade rating. Ratings cuts hurt debt issuers by making borrowing more expensive.

All Class

In another recent development, electricity customers in Washington state have filed a lawsuit seeking class-action status against six power trading companies -- the first lawsuit of its kind filed outside California.

The complaint, filed Monday in California Superior Court in San Francisco, accuses the electricity traders of conspiring to drive up power prices in 21 public utility districts across Washington. It demands that the companies return any wrongfully gained profits amassed since January 2001 and pay damages to hundreds of thousands of Washington residents.

Defendants include units of

Duke

(DUK) - Get Report

,

Dynegy

(DYN)

,

Mirant

( MIR),

Reliant Energy

(REI) - Get Report

,

Sempra

(SRE) - Get Report

and

Williams Energy Marketing

.

A Seattle judge last year dismissed a similar class-action lawsuit filed on behalf of California ratepayers, saying that only FERC can determine whether electricity rates are reasonable and, if so, demand refunds. But several other class-action lawsuits are still pending against energy trading companies.