Seldom are the conflicts between business and government shown in such sharp relief as when utility companies seek rate increases during times of rapid inflation.

This is one opportunity for a government agency to show it cares about consumers and business customers by keeping prices from rising in tandem with costs. But does anyone gain from this exercise, even if it is popular for the short term?

A sober new investigative report about Washington Gas Light Co., a "management audit" of the local utility conducted by the consulting firm of Cresap, McCormick and Paget Inc., indicates that we all lose when relations sour in dangerous fashion between a business and a government agency that must work together.

Cresap, McCormick's study, mandated by the D.C. Public Service Commission, was undertaken with the regulatory agency's direction from March through September. A final report has been submitted to the agency, and it is on the public record at PSC headquarters in downtown D.C., but there have been no public announcements of the conclusions.

This is not exactly the sort of report a public relations person welcomes or promotes. The subject matter is complex, and it attracts emotional responses. Moreover, in the case of this study, there is no single villain; serious problems exist, but there's blame to share on both sides of the uneasy confrontation between Washington Gas and the city's PSC.

Actually, there are two significant findings in the management audit.

The promising news is the Washington Gas, founded in 1848, is "in numerous respects, a well-managed utility enterprise . . . the results of this audit indicate that the company is most effective at furnishing proficient and responsive gas utility services to its customers on a day-to-day basis, its most basic corporate obligation."

WGL employes are singled out for consistently demonstrating a "high degree of dedication to duty and strong technical competence," while the firm is praised for exemplary employe and customer safety programs and its applications of modern data technology to improve customer services and help control costs. WGL serves the entire metropolitan region and must deal with regulatory agencies in all three jurisdictions on matters of rates and other operations.

The consultants have many good things to say about WGL, but they are overshadowed by "certain recurring patterns" regulatory relationship in the District.

"While WGL has been able to develop generally favorable relationships with regulatory agencies elsewhere, virtually all knowledgeable observers contacted during the study noted that an atmosphere of strain and inadequate communication characterizes most company-PSC relationship in Washington, D.C.," the report said.

WGL is faulted for failing to formulate and implement a program of community-wide communications of substance and for short-comings in development and presentation of rate increase requests to the city agency.

But, in an even-handed fashion and despite the fact that the consulstants were working for the PSC, Cresap, McCormick also criticized the regulatory agency. "The commission lacks access to techniques, enjoying increased use elsewhere, to overcome poor communications between regulatory agencies and jurisdictional enterprises," the consultants stated.

For example, the D.C. agency (underfunded and understaffed, as are many city operations because of an ongoing financial crisis) has not yet followed regulatory agencies in many states by establishing an annual review process. The consultants said this regular exchange, used in Maryland and Virginia, fosters informed and informal dialogue.

In the District, however, virtually all communications between the agency and WGL take place in "the adversary arena of rate-case proceedings, an environment that is not conducive to a free exchange of impressions, ideas and viewpoints."

No mechanism exists through which vital matters of interest to consumers, stockholders, the company and the commission can be the subject of informal discussion with PSC members. Issues cited include long-term supplies of natural gas, marketing, facilities, financing and employment plans.

The bottom line has been a major deterioration of Washington Gas profitability in D.C. According to the consultants, WGL has suffered a shortfall of revenues totaling $45 million from 1975 through 1979.

This has happened because the D.C. agency refused to approve rate increases for WGL to bring in revenues at levels that the agency itself has agreed are permissible and desirable. For example, the D.C. agency agreed with its counterparts in Virginia and Maryland that the permitted level of profitability for 1978 and 1979 was 9.25 percent (the rate of return allowed on total investment in plant and equipment to provide service).

In Maryland and Virginia, Washington Gas was allowed to raise customer rates to reach rates of return that ranged from 8.31 percent to 9.14 percent.

But look what happened in the District: Over the past two years, WGL's rate of return in D.C. was 3.5 percent to 3.71 percent. The highest rate of return in the past five years in D.C. was 6.47 percent in 1976, when earnings of 9.25 percent were found proper.

The report attributes the difference to the use in Maryland and Virginia of periodic rate adjustment proceedings to ensure that the authorized rate of return is an attainable goal.

Despite poor profitability in D.C., WGL management has continued to invest resources in the city and to maintain services on a comparable level with the suburbs, the consultants said. But the WGL board of directors has increased legal responsibility to pursue wise investment of shareholder resources and a continuation of current trends "could lead to reduced availability and quality of gas utility service to Washington . . . and affect adversely the economy of the city as a whole."

That's not what Washington needs at this time. And the consultants said it doesn't have to happen.

At the end of the report, Cresap, McCormick and Paget make about 90 specific recommendations to WGL and the D.C. agency to improve their operations. WGL was faulted strongly for some of its personnel practices, including location of human resources offices in Rosslyn, far away from the main D.C. headquarters or the principal suburban plant in Virginia.

In some instances, the consultants found fat in middle-management levels at WGL and recommended abolition of some executive jobs. A total of $2.4 million in annual savings was pinpointed, but the consultants also emphasized that this figure is a "very modest" percent of total spending and pales by comparison with revenues lost because the PSC won't allow permitted profit levels to be achieved.

WGL was told to move aggressively to seek out opportunities for improvment noted in the study, and the PSC was told to join WGL in strengthening mutual communication. The agency also was advised to explore new policies, such as annual reviews and exploration of interim methods to prevent future WGL revenue deficiencies of a magnitude comparable to recent years.