Though final details of the plan must be worked out, the framework calls for the state to establish its first-ever power authority and strike a deal with California's two biggest utilities that would give the companies sorely needed cash. In return, the utilities--LA-based Southern California Edison and Northern California's Pacific Gas & Electric Co.--would essentially issue stock options to the state.

If shares of the utilities' stock rebound off their current 52-week lows, California could exercise the options and generate millions--or possibly even billions--of dollars for the state's treasury. But if the plan doesn't work, much of the state's current $10-billion surplus could be wiped out.

Meantime, Democratic California Gov. Gray Davis and some of his key administration officials are backing away from their earlier pledge that commercial property owners, businesses and residential consumers won't face any more rate hikes to help bail out the financially troubled utilities. "It is my sense that there will need to be some modest increase in the future, based on the numbers I have seen," says state finance director Timothy Gage.