RICHMOND -- Virginia would auction a limited number of liquor licenses to large and small retailers and dedicate the proceeds to the state's cash-starved transportation system under a proposal emerging in Gov. Bob McDonnell's administration -- a move that would more than double liquor locations statewide.

The limited privatization plan would fulfill McDonnell's goals of getting the state out of the booze business and generating a one-time windfall for transportation needs, while still maintaining control over the proliferation of liquor stores. The plan could make distilled spirits available at as many as 800 retail spots throughout the state, far more than the 332 stores now run by the Department of Alcoholic Beverage Control.

Localities would be able to set zoning policies to regulate where spirits are sold, according to the plan.

The proposal appears to have the most support of four privatization models the administration has discussed in meetings with representatives of the liquor industry, retailers, public safety advocates and faith-based groups, said Eric Finkbeiner, McDonnell's senior policy adviser.

"That's the one that gets the most head-nodding," said Finkbeiner, the administration's point man on the issue.

Finkbeiner outlined the privatization proposals Tuesday for members of McDonnell's Commission on Government Reform and Restructuring. The commission is expected to make a recommendation next month to McDonnell, who plans to call a special legislative session on government reform later this year.

Three other privatization models, including one that could allow for 2,000 to 3,000 liquor retail outlets statewide, have been discussed. But Finkbeiner cited drawbacks to each of the proposals.

Virginia is one of 18 states that control the wholesale and retail distribution of distilled spirits. McDonnell has said repeatedly that retail liquor operations are not a core function of government and should be privatized, and that one-time revenue from license sales should be used for transportation.

The Republican governor faces obstacles, including skeptical Democrats who question whether the shift will drain revenue from the state's general fund and have costly public safety implications. Sen. Mary Margaret Whipple, D-Arlington, said she still had reservations after hearing Finkbeiner's presentation Tuesday.

"Nobody is ever going to make me think this is good way to fund transportation," said Whipple, the chairwoman of the Senate Democratic Caucus and a member of McDonnell's commission. "Whether the other issues can be addressed in a way that is satisfactory, I haven't seen enough of a plan to know that."

Lawmakers from both parties also have raised concerns about opening the door for a widespread proliferation of liquor stores, a concern that McDonnell has said he shares. Finkbeiner told the commission that McDonnell wants to maintain the state's ability to regulate signage, marketing and advertising "so we can do this in a very conservative Virginia way."

Under a proposal outlined Tuesday, the state would establish three levels of retail licenses that would be auctioned to large stores, independent package stores and small-volume convenience stores. The state would limit the number of licenses, with perhaps as many as 800 retail locations being allowed statewide, Finkbeiner said. Wholesalers would purchase licenses based on volume and the geographic areas they serve. The state ABC would remain responsible for enforcement of liquor laws.

The privatization plan would ensure that areas now served by a state-run liquor store would continue to have a nearby liquor retailer, Finkbeiner said.

Finkbeiner said the proposal would generate roughly the same amount of revenue the state now gets from its excise tax and wholesale markup. Liquor taxes and profits generated $322.3 million in the 2009 fiscal year, with $247 million going to the general fund.

Finkbeiner said the privatization plan could generate anywhere from $300 million to $500 million in upfront cash for transportation projects. The estimate partly depends on the number of licenses the state would auction, and that remains undecided, Finkbeiner said.

Whipple said it would be essential to make sure annual general fund revenue is "locked down." But she said she also has concerns about allowing for large-scale growth of liquor retail sites.

"I don't know where my comfort level is, but it isn't much higher than where we are now," she said. "I have a lot of concern about that."