The District of Columbia Public Service Commission yesterday trimmed the electric rate increase requested by Potomac Electric Power Co. by more than one third--approving only a $23.3 million-a-year boost in electric rates.

The PSC not only slashed $13.8 million from what Pepco was asking, but also criticized Pepco's construction of a new power plant to burn costly oil and ordered a freeze in electric bills for D.C. residential customers who use only small amounts of electricity.

As a result, electric bills will not go up at all for people who use less than 450 kilowatt hours of power a month and the monthly bill of a typical consumer will increase by only 15 to 75 cents a month, the agency said.

The decision was a serious setback for Pepco, which had claimed it needs to raise electric rates because inflation is eroding the company's profits.

The PSC rejected that contention and said a two-year study of Pepco's program of building new power plants shows the construction program is costing consumers money.

The commission singled out for criticism Pepco's newest power plant at Chalk Point, Md., which will go into service early next year. Known as Chalk Point 4, the plant will generate electricity by burning oil and is believed to be the last major oil-fired power plant built since the Arab oil embargo of 1973.

D.C. People's Counsel Brian Lederer has contended for three years that Pepco's customers would save money if Chalk Point 4 were converted to burn coal instead of oil.

Delivering what amounted to an ultimatum, the PSC ordered Pepco to report within 90 days on the feasibility of switching the plant to coal.

Commission member Wesley H. Long complained that his colleagues did not go far enough. In an unusual dissenting opinion, Long said the commission not only ought to order Pepco to convert the plant to burn coal but also should penalize the company for not starting the conversion two years ago.

Criticizing Pepco for "stubborn inaction" on the question of converting to coal, Long said the power company should have started working on the issue in 1979 "when it became clear that their planning program was out of control."

"Conversion of Chalk Point 4 should begin immediately," Long said. "The numbers are clear, the PSC can save D.C. electricity customers anywhere from $32 million to $655 million over the next 25 years by beginning the conversion process immediately."

Every day that Pepco delays switching the plant to oil costs consumers money in higher fuel bills and simultaneously pushes up the cost of the conversion work, Long said.

He suggested penalizing Pepco by letting the company charge customers only what it would cost to make electricity from coal; the added cost of oil as well as extra construction cost from the delay ought to be paid by Pepco's stockholders.

The PSC, Long urged, ought to "make Pepco's shareholders aware of inadequate management by placing the burden on them."

PSC member Patricia Clement said she agreed there was enough evidence to justify ordering Pepco to switch the plant to coal. But Clement and PSC Chair Ruth Hankins-Nesbitt said they prefer that Pepco take the action itself.

Pepco Chairman W. Reid Thompson said the company would complete its study of converting the plant within three months but indicated the company is still reluctant to make the decision.

The cost of new power plants is the number one factor driving up electric bills, Thompson said, and it will cost upward of $700 million to switch the Chalk Point plant to coal "Obviously, a decision that will cost that much has to be considered very, very carefully."

Thompson said Pepco faces "a very volatile situation with regard to fuel prices" and noted that since the PSC study was made the cost of coal has gone up and the cost of oil has come down.