Potomac Electric Power Co., following a new trend among utility firms, plans to borrow $65 million on the European money markets to refinance current debt at a lower interest rate than now available in the United States.

Pepco has applied to the D.C. Public Service Commission for permission to execute a three-year loan with a group of Common Market banks led by Merrill Lynch International Bank Ltd., a subsidiary of the U.S. brokerage firm.

Announcement of the Pepco proposal was made by the PSC yesterday in the D.C. Register, a weekly publication of the city's legal notices. The PSC said it expects to decide by May 12 whether to approve the loan.

Business Week magazine reported this week that utility firms are leading a trend among U.S. corporations toward borrowing on European money markets to escape tight financing and high interest rates in this country.

In its application to the PSC Pepco said it is turning to Europe because of the "current chaotic and unstable condition of the long-term senior securities markets" in the United States.

The $65 million would replace a $25 million loan recently paid off by Pepco and would refinance much of Pepco's existing $90 million of short-term debt. Pepco's press relations office was unable late yesterday afternoon to provide information on the current or prospective interest rates affected by the loan.

In a relted development, Pepco also asked the PSC to let it borrow $50 million from Prince Georges County to acquire and install air pollution control equipment on its coal-burning power plant at Chalk Point, at the southern tip of the county.