The Maryland Public Service Commission yesterday granted Pepco a $31.66 million rate increase--about one-third of the $95.5 million the company had requested.

Pepco estimated that the rate increase will add $3.39 to the average 689-kilowatt-hour Maryland residential customer's bill, which is now $47.44. Pepco must file, and the commission must approve, a revised rate schedule before the rate goes into effect, but that is expected to occur shortly.

The increase covers more than 322,000 residential customers and 28,000 commercial customers in Montgomery and Prince George's counties. Those customers account for approximately half of Pepco's annual revenues.

Pepco President W. Reid Thompson, who told shareholders at the company's annual meeting yesterday that the utility suffered from extraordinarily high capital costs and a lag in recovering those costs, expressed disappointment with the decision.

"The company needed major rate relief in Maryland to meet the current costs of providing service," he said. "Although this increase is urgently needed, the decision falls far short of covering our costs of serving customers."

Pepco had asked for an increase of 18.9 percent in revenues when it filed its rate increase request last September. What the PSC granted yesterday amounted to an increase of 6.3 percent.

Thompson said that Maryland rates have been increased since the beginning of 1977 by a total of less than 10 percent in six rate orders. He said that the total unit cost of electricity, including fuel charges, has increased 35 percent in Maryland during the same period.

"We're glad to see a reduction, but the commission didn't rule directly on the issues we had raised," said Tom Gorak, assistant people's counsel for the State of Maryland. Gorak said the office has not decided whether to appeal the order.

The Office of the People's Counsel had asked the PSC not to allow any immediate recovery of money spent on construction work in progress and had asked it to figure Pepco's depreciation at a lower rate.

The PSC allowed the company to add to its rate base the cost of construction work in progress on pollution-control devices.

The PSC also said no to Pepco's request for a higher rate of depreciation but said that it would investigate whether it was needed.

Pepco also was granted a lower rate of return on equity than the 17 3/4 percent rate it asked. That rate had been reduced to 16 percent in an initial order by a hearing examiner who also had granted Pepco an increase in revenues of slightly more than $38 million. Yesterday the PSC reduced the allowable return on equity further to 15 3/4 percent. That figure represents an increase from a 13.65 percent allowable rate of return put into effect with Pepco's last Maryland rate increase in April 1981.

In another departure from the initial ruling, the PSC ruled that Pepco could receive no "attrition" allowance--a sum supposed to compensate for the erosion in earnings that will occur because of inflation after the new rate goes into effect.

The order also allows Pepco to institute a $5 charge for returned checks and to increase the reconnection charge from $3 to $15 for customers disconnected for cause. Pepco already is allowed to make such charges in the District.