The D.C. Court of Appeals said yesterday that the Potomac Electric Power Company must be reinbursed for us much as $20 million in revenue the company was improperly denied by the city's Public Service Commission.

A three judge panel, in a 2-to-1 decision, said the commission acted in an arbitrary and unreasonable fashion when it denied Pepco the full rate increase it requested in November, 1975. The decision is subject to appeal either to the same panel or to the full nine-member Appeals Court.

In the majority opinion, the court suggested that Pepco be allowed to attach a temporary surcharge to its Washington customers electricity bills over a period of time until the losses are recovered.

Specifically, the court sent the rate dispute [WORD ILLEGIBLE] back to the commission and directed it to calculate how much revenue Pepco lost as a result of the commission's order. The commission must then "devise a means for restoring to Pepco the revenues which it improperly has been denied."

The $20 million estimated loss represents the difference between the full amount of revenues Pepco requested in 1975 and the amount authorized by the commission in its 1975 order.

How much of that Pepco recovers will depend on various factors, including unusually severe weather that would have increased Pepco's revenue's during the period when the imporper rate structure was in effect, the court noted.

In asking the Appeals Court to review the commission's order, Pepco argued that the commission arbitrarily refused to take into consideration certain data about the utility's financial condition when it considered Pepco's rate increase request.

At that time, Pepco requested the commission to approve a rate increase that would yield an estimated $50.8 million increase in its revenues. The commission, however, approved an increase of only $27.6 million.

The commission's decision essentially was calculated on information pertaining to Pepco's financial condition in the "test year" of 1974. Pepco argued that the commission should have considered other evidence of increase expenses and declining earnings, which showed that 1974 was not representative of the future period during which the new rates would be in effect.

By relying only on the 1974 data, the Appeals Court said, the commission "all but made it certain" that Pepco would not be able to earn the rate of return on its investment that the commission itself "found to be necessary to attract capital and maintain investor confidence" in the utility.

"In an attempt to keep rates down . . . the commission impermissably ignored the consumers' and the investors' long-range concerns with the financial stability of the utility," Judge Stanley S. Harris said in writing the majority opinion.

Judge J. Walter Yeagley, in a dissenting opinion, said the majority was directing the commission to accept all the utilities additional data "on face value" and thus grant the utility the full amount of revenue increase it had requested - well over $20 million.

Yeagley argued that use of data other than the 1974 test year was up to the discretion of the commission and was not a matter "to be taken over by an appellate court."