Under the phone rate increase application filed this week by C&P Telephone Co., District of Columbia businesses will be forced to either learn conversation conservation or put their money where their mouth is.

Though the company announced Thursday it is seeking to raise rates by $67.7 million, the rates proposed by the AT&T subsidiary will cost users $109 million a year unless customers hold down their bills through conservation, C&P's inch-thick rate application discloses.

Business phone bills will jump 28 percent if the D.C. Public Service Commission grants the entire increase sought by C&P.

If granted, the business phone hike will be the second in a year for Washington firms. In its last phone rate decision, the PSC left residential rates unchanged, but boosted business and government rates by 10 percent.

Less than 10 percent of the telephones in the District are in business offices, but business customers will be asked to provide 38 percent of the additional revenues the phone company is seeking. Another 32 percent of the extra revenue is projected to come from government agencies.

Just how much business phone bills increase will depend on how successful business people are in compensating for the higher phone rates.

C&P is projecting that telephone "conservation" will enable businesses and the government to escape more than 40 percent of the increase in rates.

But phone company critics, including D.C. People's Counsel Brian Lederer, doubt that savings can be that great. Lederer says the issue of how phone customers will adjust to higher rates is one of the complications the Public Service Commission will have to consider in reviewing the biggest rate increase ever asked by C&P.

"We are now faced with the same problem with telephones we had with the Arab oil embargo--doubling or tripling prices," said Lederer.

The rapid rate hikes were set off by deregulation of the communications industry. Once a nationwide telephone monopoly, American Telephone & Telegraph now must compete for much of its business.

Individuals can now buy their own telephones for less than it costs to indirectly rent a set from the phone company. Businesses can buy or lease internal communications systems and private branch exchanges instead of paying for the service in their monthly phone bills. Long-distance calls can be routed through MCI Communications Inc., Southern Pacific Communications Co. or other AT&T competitors.

Facing such competition, the Bell System is changing its pricing structure. Competition rather than government regulators determines how much Ma Bell can charge for long distance calls, PBX systems or princess phones.

In order to offer competitive prices for the deregulated services, AT&T is raising prices in the monopoly sector of its business, says consumer advocate Lederer.

C&P spokesman Web Chamberlain sees things differently. He says long-distance service has traditionally subsidized the cost of local calls, and charges for complex business phone systems have paid part of the cost of residential service. Now all customers will have to pay their own way.

"What they're doing is loading the costs on the people who don't have any alternative," counters Lederer.

"Big businesses can go somewhere else" for phone systems if they object to AT&T's prices, he added. "Homeowners can scream to their city council member. It's the small- and medium-sized businesses that don't have anywhere else to go or anyone to scream at."

Even Ralph Nader, not usually considered a backer of business, says, "AT&T is trying to push the cost on the business user." Nader said the phone company apparently is confident it can push through such a stiff rate hike because most of its big business customers in Washington are law firms, lobbyists and trade associations that can easily pass the bigger phone bill on to their clients.

Admitting he may not be the best person to do the job, Nader says, "there needs to be a consumers' telephone-users group organized here."

Nader suggests that C&P's bid for a stunning rate increase in Washington is a "power play" by the Bell System to discourage Congress from completely deregulating the communications industry.

Says Joe Waz, deputy director of the National Citizens Committee for Broadcasting: "The phone company is trying to terrorize the Congress into thinking that such unbelievable rate hikes will be the inevitable result of any legislation that increases competition in the telephone business.

"When Washington consumers realize they are being used as pawns in the phone company's legislative games, you can expect consumers to make plenty of noise."

Phone folks shrug off such rhetoric, and in filings with the PSC argue for the rate increase on the traditional grounds that the company is not earning an adequate return on its investment in facilities to service local customers because of inflation.

Without the rate increase, C&P says, it will earn only a 4 3/4 percent return instead of the 10.66 percent authorized by the PSC when it granted a rate increase a few months ago. Even that is inadequate, C&P contends, asking that its rate of return be increased to 13.66 percent.

Lederer has not yet filed his formal response to the phone company's request, but says the low rate is the result of the company's change in pricing strategy rather than inflation.

When it announced its request for higher rates on Thursday, the phone company said it was seeking to raise its annual earnings by $37.4 million a year, a relatively modest increase.

To produce that much extra profit after taxes, phone charges would have to be raised by $67.7 million a year, C&P said. But the company is counting on the rate increases to save it $14.2 million a year in operating expenses--by reducing calls for information and operator assistance, reducing installation costs and other economies.

The net result would be an $81.9 million increase in phone company earnings for the year.

But C&P's application to the PSC calls for rate changes that would increase bills far more than that--unless customers practice conversation.

The rates proposed by C&P would increase phone bills by $109 million a year, adding $22 million to residential bills, $45 million to business bills, $37.8 million to government bills and $3.2 million to pay-phone revenues.

C&P contends rates have to be set that high to offset the conservation effect expected to result from the rate increases.

The company claims residential users will be able to compensate for $3 million of the $22 million increase by making fewer calls, sacrificing optional phone services or making economies.

Increasing business and government rates by $83.5 million would actually yield only $47.2 million in new revenues, because the customers could find ways to cut their bills by $36.3 million a year.

Even hiking the cost of a pay phone call from 15 cents to a quarter won't yield as much revenue as the 66 percent increase suggests, according to the phone company application. Almost 32 million pay phone calls a year are made in the District, the application indicates, but boosting the charge to 25 cents will cut that number to 24.6 million.