Yesterday, Calpine (NYSE:CPN) powered up to the tune of a 14% gain, the second largest gain on the NYSE, on nearly 4 times the average volume. Reading its third-quarter press release, one has to wonder why investors were snapping up shares as though they found the proverbial $100 bills lying in the street.

The operating measurements were really not very good. Spark spreads (the difference between the price paid for electricity and the price of the fuel required to generate that electricity) remained weak at $21.40 per megawatt-hour and below the $23.88 from last year's third quarter. Calpine's capacity factor, which measures the percentage of power generated relative to the potential power available, dropped from 60% to 56%. That is significantly below fellow independent power producer AES (NYSE:AES), whose capacity factor is greater than 75%. But the decline was because new capacity came on line faster than new generating contracts were signed. Isn't it interesting that Calpine can't use all the assets it has and yet it continues to build more?

So if it was such a rough quarter, why did the stock take off like an Enron (OTC BB: ENRNQ) energy trader had manipulated it higher? Perhaps the market was looking ahead.

The press release mentioned that Calpine had signed 67 new generating contracts through Sept. 30, 2004. These contracts have an average life of five years and an average spark spread of $17 per megawatt-hour. While those spreads are less than the $21.40 for the quarter, it is a good sign that there is still some demand out there. And to keep the party rolling, California's energy commission decided to increase the state's electricity operating reserve from 7% to 15-17% by the summer of 2006. Sweet! An increase in demand is exactly what Calpine needs to really turn things around as it has plenty of unused supply (think low capacity factors).

With oil and gas prices so high, spark spreads are not likely to improve anytime soon. But if Calpine continues to reduce its operating costs while increasing its capacity factor, it should be able to start generating more operating cash flow as spark spreads recover. And that would be a much better way to get out from underneath the pressure of all its debt rather than continuing to swap current debt for debt with higher interest rates.

So while Calpine had a tough quarter, investors seem to think that the future is a bit brighter. Is it going to turn into a high flier like Travelzoo (NASDAQ:TZOO) or Google (NASDAQ:GOOG)? Not any time soon. But apparently it will be able to keep the lights on a little while longer.

Fool contributor David Meier owns shares of AES. He does not own shares in any of the other companies mentioned.