I don't know if you read the comments on the story, but there are a couple folks who complain the using citizen blogs is essentially getting free content.
On one level that's true (like this listserv and my blog), but it's certainly a different type of content (or I think it is). Gillmor points out that the best bloggers will get paid -- I think that's what he says. I'm not entirely sure.
ANYWAY -- the idea is great and it's no great surprise that it's the San Jose Mercury News, which had one of the best reporter blogs on the planet (Dan Gillmor's blog, the model for what newspapers should do).