District of Columbia regulators yesterday authorized D.C. businesses and homeowners to shop for electric power from suppliers of their choice, following in the steps of Maryland and Virginia, where deregulation already has been approved.

The action by the D.C. Public Service Commission also clears the way for Potomac Electric Power Co. to auction off its electric plants in Maryland as it abandons most of its power-generation operations to concentrate on selling power and related services. The D.C. Council signed off on the actions last week.

Before giving its approval, the D.C. Public Service Commission required a 7 percent rate reduction for residential customers that will remain in effect for four years.

Residential consumers will receive a 2 percent rate cut tomorrow, followed by a 1.5 percent rate reduction six months later and a final 3.5 percent rate cut a month after the power plants are sold.

The company said the rate reductions would cut the average household monthly electric bill of $48 by $3.50.

Pepco announced last February that it intended to sell its power production plants in favor of selling and delivering electricity and other products such as telephone service. It will immediately begin to auction its Maryland plants, a process that it expects to last about two years.

Under the settlement agreed to by the public service commission, Pepco and Pepco's major commercial and government customers, the company will sell four plants but retain ownership of two plants in the city that supply about 1 percent of the company's power. The D.C. plants are at Benning Road in Northeast and Buzzard's Point in Southwest.

The book value of the Maryland plants has been estimated at $1.8 billion and some utilities have sold their plants for two to three times book value.

Pepco's commercial and government customers in the District will receive a three-step rate cut totaling 6.5 percent.

The District's People's Counsel office, which represents consumer interests in regulatory proceedings, didn't sign on to the settlement. Nor did the city's Consumer Utility Board, an independent group that receives technical and administrative support from the People's Counsel office. The group's chairman, Herbert Harris Jr., said the settlement only caps rates for four years, which is too short a time.