The plan approved by the Public Utilities Commission creates a bidding procedure for deciding who gets to build power plants in California. Before, power plant construction was largely the job of the investor-owned utilities, such as Pacific Gas and Electric Co.

Now utilities will submit new proposals to a kind of auction system in which the merchant generators can compete for the right to build the plants themselves and then sell the power under contract to the utilities. The auction will be refereed by an outside party known as an independent evaluator.

The PUC decision was applauded by Gov. Arnold Schwarzenegger, who vetoed a bill in September that would have created a more regulatory- based system and given traditional utilities more leeway to build their own plants.

"These new guidelines will help to ensure that Californians get the most reliable sources of energy at the best prices available," he said in a prepared statement.

But some consumer advocates argued that the free-market system would invite a repeat of the energy crisis, during which merchant generators raised wholesale power costs dramatically, driving PG&E into bankruptcy protection. State officials are seeking billions of dollars of refunds from the generators through the federal government.

Thanks to the PUC decision, "Christmas has come early" for the merchant generators, said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights.

But Mike Florio of The Utility Reform Network in San Francisco, another consumer advocacy group, said the PUC approach does create buffers "if the market goes haywire."

"Having been burned once, we're a little reluctant to put blind faith in the market to always offer reasonable prices," Florio said.

Calpine Corp., a San Jose-based generator, said the decision will lead to lower costs for electricity.

"The decision today will result in companies openly competing to drive down costs for the ratepayers," said spokesman Kent Robertson.

Robertson said the bidding process will translate into the cheapest electricity possible. "This is comparison shopping, it puts everybody on a level playing field," he said.

Population growth and an expanding economy brought a big jump in electricity use this summer and led to predictions that blackouts could hit by next summer or 2006. With the debate over power plant construction now apparently resolved, the Schwarzenegger administration hopes developers will jump into the market and begin building new plants.

The deregulation approved by the Legislature in 1995 directed the big utilities to sell many of their plants to independent generators, which then sold power back to the utilities on a daily, state-sanctioned spot market. The system worked fine for the utilities until mid-2000, when prices soared.

The new PUC system allows the utilities broader authority to buy power through long-term contracts, giving them greater certainty about price.

"Today's vote corrects one of the major contributors to the energy crisis," Schwarzenegger said. "By giving the utilities the ability to enter into long-term contracts, California will avoid being at the mercy of the spot market."