The D.C. Public Service Commission yesterday ordered Potomac Electric Power Co. to proceed immediately with plans to implement a time-of-use rate structure for the utility's 800 biggest residential customers in the city.

The PSC instructed Pepco in a unanimous decision to begin immediate installation of time-of-use meters at residences which the utility will identify from its records as the biggest users of electricity.

In another major decision yesterday, the PSC ended a protracted dispute over Pepco's construction plans by refusing to order the company to convert an oil-fired generator to burn coal. Pepco estimates that it will save more than $700 million by not having to convert the plant at its Chalk Point, Md., generating station.

The time-of-use rate system (formerly called time-of-day) will be mandatory for the 800 residential customers who will be chosen by Pepco to receive the service, the commission said. Customers in that group will be selected from among those whose use of electricity exceeds 3,500 kilowatt-hours during any two summer months.

By charging lower rates during non-peak hours, utilities maintain they can induce customers to change their habits and thus the hours during which most of their consumption of electricity takes place.

During the first year, Pepco will maintain parallel billing records to show customers how much they would have to pay for electricity under the time-of-use system. Customers would continue to pay for electricity under the conventional method of measuring consumption during that period, however.

The utility will be required to file a time-of-day cost-effectiveness study with the commission.

Pepco had sought to provide the time-of-use service as an experiment for about 150 residential customers in the District. Company officials were surprised, however, by the commission's decision to include such a large sample in the order.

It is uncertain, therefore, how soon Pepco will be able to phase in the time-of-use system for residential customers in the District. The whole process of identifying the customer base, ordering new meters and installing them could take about a year, a Pepco spokesman said.

The spokesman also said Pepco anticipates that the PSC will call another hearing within the year to establish a rate design for the time-of-use system.

Pepco already has a time-of-use rate program in effect on an experimental basis in Maryland for 250 large residential customers and 120 of its biggest commercial users. The Maryland experiment began in late 1982.

A similar experiment involving commercial customers in the District was conducted as a forerunner to the latest time-of-use experiments. That program is no longer experimental, however, and at least 295 commercial customers in the District are billed according to time-of-use.

Time-of-use billing is an important part of Pepco's load-management program. Load management, in effect, is shaving peak demand by changing consumer habits. Under the 1978 Public Utilities Regulatory Policies Act, utilities were authorized to study the feasibility of time-of-use rate structures that would permit them to reduce peak demand and spread power use.

The PSC's refusal yesterday to order Pepco to convert the Chalk Point plant to burn coal culminates a controversy that had simmered for more than a decade.

With its ruling, the PSC resolved two questions essentially--whether Pepco acted reasonably in constructing the plant at Chalk Point and whether it should have been forced to convert to burn coal as a cheaper fuel.

Although virtually all of Pepco's generating plants burn coal, the utility began construction of an oil-burning power plant before the 1973 Arab oil embargo as a back-up to handle peak loads. The plant was completed last year.

The D.C. People's Counsel, who represents consumers in District regulatory matters, had been highly critical of Pepco's construction plans and had urged the PSC to order the utility to convert its Chalk Point 4 plant to burn coal.

Pepco, on the other hand, had maintained that conversion would be too costly.