Customers of the Chesapeake & Potomac Telephone Cos. may soon get millions of dollars in refunds in the wake of a Supreme Court ruling that affirmed the right of state regulators to establish their own accounting rules for allocating charges for existing telephone equipment.

The Maryland Office of the People's Counsel, which represents consumers before the state Public Service Commission, last week called for the PSC to compel C&P of Maryland to refund what it termed "overcharges" to consumers. "We consider $50 million the floor, and the sky's the limit," said Fred Hoover, assistant Maryland People's Counsel.

Officials at all three area commissions -- the D.C. Public Service Commission, the Maryland Public Service Commission and the Virginia Corporation Commission, say refunds to customers may be on the way, although they cannot specify exact amounts.

More significantly, the court ruling now allows state commissions to decide how quickly updated equipment should be installed by telephone companies and who should be paying for it.

"The Supreme Court decision frees up the PSC to consider the issue in a very basic way: how quickly the telephone network should be modernized," said an official at the D.C. Public Service Commission.

In 1980, the Federal Communications Commission put into effect a general rule that dictated a quicker method for paying off -- or depreciating -- existing equipment in the telephone network so that regional telephone companies could upgrade the network more rapidly.

That resulted in a faster depreciation schedule and higher rates to consumers in some states.

According to one FCC official, the decision made good sense. "If you modernize the network and make it more efficient, you ultimately lower the costs to the consumer." Without paying for older equipment more quickly, telephone companies are hamstrung in modernizing and keeping customers satisfied, the official said.

But a group of public service commissions sued the FCC, saying it had no right to dictate depreciation rates for existing equipment, in a case that went to the Supreme Court.

Now that the issue is back in the laps of state regulators, between $5 billion and $6 billion nationally in refunds, lower rates to consumers and frozen local rates is on the table for debate, according to Walter Bolter, a telecommunications economist and director of the Bethesda Research Institute, which consults for state and local government agencies.

In reaction to the Supreme Court decision, Maryland is reconsidering the faster depreciation schedules it put in place a few years ago to comply with the FCC ruling. Depending on what the Maryland PSC decides, C&P of Maryland could be refunding up to $50 million, according to C&P.

In the District and in Virginia, commissions have approved depreciation schedules in line with the FCC ruling, and PSC officials say they will reevaluate the depreciation issue in light of the court decision.

The issue is important to local telephone companies that say faster depreciation schedules are needed so they can install more modern, efficient and ultimately less expensive equipment to provide basic and new services that customers want.

"Galloping technology and divestiture make it essential that the network be modernized," said John Sodolski, president of the United States Telephone Association.

"If it is not, large business customers will have a technical incentive to leave the local networks and do their own thing." If that happens, a smaller base of mainly residential and small-business customers end up paying for a telephone network, he said.

New "desirable services" -- such as security services, remote meter reading and the coding of telephone rings to screen telephone calls -- also are on the horizon with new technologies, he said.

So far this year the industry, as a whole, has spent $20 billion modernizing the network, up from $17.5 billion for all of 1985, according to USTA, which represents 1,400 telephone companies. The amount is expected to continue to rise by at least $1 billion a year.

In short, the telephone network is evolving from one that provides plain old telephone service to one that will be called "Integrated Services Digital Network" -- a network that will transmit telephone conversations, digital information, facsimile service and video signals.

But as one industry observer puts it, "Integrated Services Digital Network really stands for Innovation Subscribers Don't Need."

Other observers say that in order to provide business services, the network does need upgrading, even though the improvements do not directly benefit the vast majority of residential telephone users. According to Bolter, "Little old ladies can use Cliff Robertson's two cans and a string to talk across town, but you can't say that for two computers talking across the country.

"The only place the new equipment will have a direct application to local calling is to set up new pricing schemes that charge for local calls much like long-distance calling so local phone customers can pay for the equipment," he said.

According to the Maryland Office of the People's Counsel, much of the telephone equipment installed in the network is perfectly good, and faster rates of depreciation serve as an incentive to let technology run away with itself.

"The faster the depreciation, the more incentive there is to modernize, but modernizing infers existing equipment does not meet the need, and that is not accurate," said Hoover. "Digital networks benefit primarily business customers, but residential customers who have little use for it end up paying the bulk of the costs."

The D.C. Office of the People's Counsel is a party to a local case that illustrates the point. The D.C. PSC has reopened the case of Centrex business service -- a service that allows business customers a private internal network -- to examine costs and who should pay for it.

The technology is subject to intense competition. In a previous case, C&P had won the right to lower rates for the service while it upgrades it to retain large business and government customers who it said would otherwise go elsewhere.

"Whether or not the public should pay for the digitalization of the network is an intimate part of the ongoing Centrex rate case," said Suzanne Crowell, spokeswoman for the People's Counsel.

"Forty-three percent of all telephone lines in the District are Centrex -- if you digitalize them, you've modernized half of the District."

The Office of the People's Counsel maintains the service is for business customers so "the cost of the digital service must be assigned to those who are going to use it."

The People's Counsel has not been in favor of faster depreciation rates because it puts a "heavy burden" on consumers when the company "has not even produced the market data to show they need to modernize," said Crowell.

C&P has said it is upgrading the telephone network prudently and is devising a way to make sure residential customers do not pay for that portion of the network devoted to providing new business services.

Vince Scott, district manager of revenue requirements for C&P, said it is important the network be technologically current. "As early as the 1960s, someone concluded [that] if we hadn't converted from manual to direct-dial to complete local calls, we would have had to employ all the employable females in the country for that task," he said.

Scott said the company is removing old telephone switches and cables and installing new ones only in situations where old equipment would cost more to keep maintaining than installing a cheaper new digital switch, or in areas where the company is extending its telephone network.

"Even though the lady makes a local call over a digital switch over which she sends no data, she benefits because the alternative is to buy a more expensive [standard] switch," he said.

According to Ned Addison, director of telecommunications at the Virginia SCC, "This is a double-edged sword."

If equipment is retired before it's lived its useful life just to put in more modern equipment, "the operating expenses are reduced but an increase in rates is required" to keep paying off the old equipment and start paying for the new.

"But let's face it -- you have to modernize. You can't have your blinders on," he said.