Instead of giving Potomac Electric Power Co. a $40-million-a-year rate increase, the D.C. Public Service Commission should cut electricity rates by more than $19 million, People's Counsel Brian Lederer recommended yesterday.

Pepco doesn't need to raise rates because if already is making more money than it should, said Lederer, whose job is to represent the public in utility-rate cases.

"When the company's earnings are too high, regulation must recognize the need to lower rates, as it recognized the need to raise rates when earings are too low," he said in his formal reply to Pepco's request to raise rates.

Pepco earlier this year aksed for a $28.9 million rate hike, then in late March amended its application to seek an increase Lederer said would cost customers $39.8 million a year. The increase sought would cost the average Pepco customer about $2.25 more a month, roughly a 10 percent increase for most consumers.

Lederer recoommended instead that pepco's average bill be cut by about 5 percent "in light of Pepco's extraordinary earnings in the past year."

By Lederer's calculations, Pepco earned a 9.6 percent return on its investment in power plants and facilities serving the District last year. Lederer said that is more than the Public Service Commission authorized in its previous decision on local electric rates.

Pepco officials said late yesterday they had been unable to get copies of Lederer's response and therefore could not comment in detail on it.

They noted that, by the company's calculations, Pepco earned only an 8 1/2 percent rate of return last year and had asked the PSC to hike that to 10.6 percent.

Lederer said five consultants hired by his office haved filed arguments against the general PEPCO rate increase.