Kero-chan's magical powers (which he can only use fully while in his true form) are derived from the sun. Hence, his main power consists of fire attacks (he can shoot fire through his mouth). He can also sense magical powers in others and is physically strong even in his small form.
The exact reason Kero-chan is unable to return to his true from before Sakura seals The Earthy and The Fiery has always been a bit confusing to me, but here is my (attempt at an) explanation...
Kero-chan derives the magic powers he must use to transform into "Kerberos" from the sun. The Fiery and The Earthy both "serve" under the sun (as Syaoran explains on episode 8), meaning they also derive their power from the sun. Apparently, Kero-chan must get his powers through those Clow Cards, since he is, after all, a creation and servant of Clow Reed. This also seems logical because you can think of the sun as made of earth and fire.
Make sense? I get the feeling I'm the only one who had trouble figuring this out...
