The Maryland Public Service Commission rejected most of an $88.5 million rate increase yesterday that Potomac Electric Power Co. had sought and granted the utility company less than a third of that amount.

The commission approved a 4.3 percent electric rate increase for Maryland customers that is expected to generate a $24.1 million boost in annual revenues for the company. Pepco's last increase was a $31.7 million rate hike approved last April.

The People's Counsel in Maryland had sought to hold the rate increase to an even lower level, arguing that Pepco was entitled to no more than $10 million.

"We did well, and we'll certainly try in the future to achieve some of the things we failed to achieve in this case," said Tom Gorak, assistant People's Counsel.

Pepco said the increase would add less than $2 a month to the average residential customer's bill of $51.75 for 670 kilowatt hours.

In approving the rate increase, the PSC lowered the company's "customer service" charge, one of three items that make up the monthly electric bill. Pepco had asked to increase that charge from $4.35 to $5, but the PSC instead reduced it to $3. The commission granted Pepco an increase in the base rate charge and left unchanged the fuel portion of monthly bills.

Gorak said his office argued that the rate should pay only for such items as the cost of maintaining and servicing meters and accounts and not for other items that Pepco had sought to include in the charge.

The PSC also reduced Pepco's rate of return on stockholders' equity from 15.75 percent to 15.5 percent.

Pepco Chairman and President Reid Thompson said the rate increase "falls short of covering the current cost of providing electric service to Maryland customers." He said inflation and the cost of capital contributed to the need for a bigger increase in the rates paid by approximately 325,000 Pepco customers in Maryland.