I'll give it a shot.
1) From the looks of your ledwiz.cfg, you have the RGB led's hooke up to 123 and 456 and 789 etc.. So with this .cfg file, you just wanna get the red's working, just so you can see SOMETHING....correct?? If that's the case, it looks OK so far.
2) What version of Powermame are you using? Powermame32 or commandline Powermame?
3) If using commandline MAME, check in you root MAME folder for mame.ini. Make sure that the following stuff is in mame.ini Also, try messing with the settings for attract, events, and controls. Try different combinations of these three.
4) If using Powermame32, go to general ame options, and check the PowerMAME tab. Make sure the options for controls, events, and attract are checked there.
5) Are you using a USB hub?? I had an issue with using a hub.....my buttins would light in attract mode, and they would make the event flashesm but they would not light up in-game (controls). Disconnect the hub, and go right to the PC's mobo.
6) If using commandline Powermame, try using Powermame32 as well. This really helped me figur out what was going on w/ my setup.
7) It sounds obvious (duh), but make sure that your keycodes are set up yo the right keystrokes within mame itself. I had this happen to me. I had my ledwiz.cfg set to light P1 buttons 1, 2, and 3:
1 48 KEYCODE_7
4 48 KEYCODE_H
7 48 KEYCODE_9
but within MAME, I had P1_button1 as "D", P1_button2 as "L_SHIFT", and button3 as "R_CTRL". No wonder they werent lighting up!!
Try some of this stuff, and lemme know what you see. I just went through these pains myself, and it is pretty fresh in my mind. Another tip is to start small. Just program your ledwiz.cfg file to light the three P1 buttons (single color) at first. Get that working, then add the rest of your CP's buttons. Get that working, then add multiple colors. Get that working, then add the individual gamename.lq files.
Give it a whirl, and report your findings here.