The D.C. City Council gave preliminary approval yesterday to a bill designed to reduce the staggering infant mortality rate in the District by requiring all family health insurance policies sold in the city to include mandatory coverage of babeis from the moment of birth. In some cases, such coverage is now optional.

Supporters of the bill contended that the measure, which is expected to increase annual insurance premiums by $2 to $5, would result in better hospital care for infants during the crucial first few weeks of life.

In some instances, the costs of treating health problems of newborns can range from $800 to $30,000, advocates of the bill argued. The new insurance provision is expected to provide hospitals with additional funds to improve care of infants during this time - especially the children of less affluent mothers, who could ill-afford such fees.

The council also yesterday passed legislation removing the satuatory limits on the amounts of money it may allocate to the Office of the People's Counsel, the city agency that represents consumers in utility rate increase fights.

In so doing, the council failed to even consider a controversial proposal made by the Potomac Electric Power Co. through two council members that would have restricted the amount of money the office could spend fighting rate-hike proposals.

The debate over the newborn health insurance was the most prolonged of the three-hour session. Infant mortality is higher in the District than in any other major city in the country.

Much of yesterday's discussion centered on whether the measure would actually help reduce infant mortality or simply shift the cost of providing care for newborns from hospitals to the insurance consumers. "It has absolutely nothing to do with infant mortality," argued council member Willie J. Hardy (D-Ward 7).

Council member John A. Wilson (D-Ward 2) questioned provisions that would in effect require all mem (the probable fathers of the children) to carry insurances as well as all women. More than half the children born in the city are born out of wedlock.

"Although we have a morally decadent society, I still have enough faith in people that if they want to do their number, they'll get some coverage," Wilson said. "If you want to shift the burden, don't shift it to me, don't shift it to the working poor. Shift it to the ones who are responsible."

The council finally approved the measure on a voice vote, with Hardy casting the only dissenting vote.

The Pepco amendment had become controversial because it was passed on to a council committee for consideration by council chairman Arrington Dixon, whose wife is consumer affairs director of the utility and who received nearly $5,000 in campaign contributions from Pepco, its officials and its lobbyists. Dixon denied any conflict of interest.

Yesterday, the Pepco amendment, which the committee failed to consider, was not even mentioned. The people's counsel measure passed its first reading on a unanimous voice vote.