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.

Prices have already jumped. Earlier this month, the state Public Utilities Commission approved an immediate 9% increase for most residential power users and a hike of 7% to 15% for small businesses, building owners and other types of enterprises.

Edison and PG&E sold off many of their power plants for billions of dollars after helping to push a deregulation bill through the California Legislature in 1996. But now, without enough plants to meet customer demand, the utilities have been forced to the brink of bankruptcy because they're paying sky-high prices to purchase electricity from smaller providers but cannot recover all those costs from ratepayers.

Efforts to solve the crisis have taken on a renewed sense of urgency in the wake of Fed chairman Greenspan's comments on Capitol Hill late last week.

"It's scarcely credible that you can have a major economic problem in California, which does not feed to the rest of the 49 states," Greenspan told the Senate Budget Committee. Some private economists have been even more blunt, saying that California could be plunged into a recession if its power problems aren't solved quickly and that the rest of the nation would soon follow suit, because the state accounts for about one-sixth of America's total economic output.

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