A clear, cold creek winds down steep, wooded Appalachian slopes from a mountaintop lake wreathed in clouds to a rain-soaked, tobacco-growing valley called Brumley Gap, an idyllic setting for a raging battle over hydroelectric power.

American Electric Power Co., a giant Ohio-based utility, has proposed to flood the Southwest Virginia valley to build what could be the world's largest pumped-storage generating plant, a controversial system of twin reservoirs joined by tunnels. About 100 families, whose homes and farms would be demolished, are trying to halt the $2 billion project.

"It's hard to start over new at my age," says Sunshine Scott, 63, whose white cinder-block house and small dairy and tobacco farm are near the middle of Brumley Gap. For four generations, he added, his family has lived there. "This would be under 300 feet of water."

Six years ago, Congress blocked the company from constructing a similar hydroelectric plant on the scenic New River near the Virginia-North Carolina border after a 14-year contest that drew national attention.

Today, the company's opponents are raising economic, archeological and environmental issues in their protracted campaign to preserve the tiny Brumley Gap community, situated beneath the Clinch Mountain range about eight miles northwest of Abingdon. Remnants of Indian civilizations dating to 6500 B.C. have been found. A Boston-based economic consulting firm has termed the proposed plant unneeded.

For more than four years, challenges by the project's critics delayed the Federal Energy Regulatory Commission from issuing a preliminary permit allowing geological and other technical studies. The multimillion-dollar tests, authorized Jan. 25, are meant to help the utility decide whether to ask the agency for a license to build the project. Opponents already have asked the federal agency for a rehearing, and threaten a court fight.

Some industry officials regard the legal skirmishes as evidence of the way special interest groups may obstruct energy development. "They exemplify the inadequacies of the current licensing system," says James E. Evans, assistant engineering director for the Edison Electric Institute, a utility group. Some environmentalists say Brumley Gap may set a precedent for broader FERC review of hydroelectric projects, especially in their initial stages.

Controversy is far from new for pumped storage. "The thing that drives environmentalists up the wall is that it is a technology that uses more energy than it produces," complains David Conrad, a water resources specialist for Friends of the Earth. "It's from the 'Burn, Baby, Burn' school of energy."

Pumped-storage power plants consist of two reservoirs, one at a markedly higher elevation than the other. The two lakes are joined by tunnels or other conduits that allow water to flow from the upper reservoir to the lower. Turbines with rotating blades are installed in the tunnels to help generate electricity. When power is needed, water is allowed to plummet from the upper to the lower lake, spinning the turbine blades. When excess power is available, water is pumped back to the upper reservoir for future use.

Such plants are designed to offset the cyclical patterns of American energy consumption. On hot summer days and during other periods of heavy demand for electricity, pumped-storage stations are used to supply extra power. At night and during other times of reduced consumption, excess power available from other plants is used to pump water back to the upper reservoirs.

Even though pumped-storage plants usually consume 30 to 40 percent more energy than they produce, industry officials say they offer two key economic advantages. One is that they use relatively low-cost energy, excess supplies available at times of reduced demand. The second is that they are much cheaper to operate than other oil- or gas-fired plants designed to meet peaks in the energy cycle.

"It is one of the economic alternatives for producing peak power," says Antonio Ferreira, a utility consultant now examining hydroelectric power issues for the Electric Power Research Institute, an industry group. Ferreira also defends pumped storage as "environmentally benign." Such plants, he notes, usually are largely hidden underground with only their twin reservoirs visible. "I've never seen one yet that was not attractive."

More than 30 pumped-storage plants now operate at scattered sites in the United States, according to industry data. Many of these have been built since the 1950s, when a cost-saving reversible turbine was developed. This double-duty equipment generates electricity as water flows downward and runs in reverse to pump water upward for storage. Several pumped-storage stations are being constructed now, including a $1.7 billion Virginia Electric and Power Co. project in Bath County, about 150 miles southwest of Washington.

American Electric Power's now-defunct project on the New River stirred one of the biggest pumped-storage controversies. It was barred when Congress included a 26.5 mile stretch within the national wild and scenic rivers system. Another pumped-storage battle ended in 1980 when Consolidated Edison Co. agreed to cancel its Storm King Mountain project on the Hudson River about 40 miles north of New York City.

Vepco's Bath plant has been troubled by financial uncertainties, job layoffs and regulatory delays.

American Electric Power officials say complaints about the Brumley Gap project are premature. "We might not build it. We might build it in stages. We might build a smaller one," says A. Joseph Dowd, chief counsel for AEP, a utility holding company that sells more electricity than any other U.S. utility. The company also ranks among the biggest utilities in assets and revenues. The Brumley Gap project, initially proposed at 3,000 megawatts, would be carried out by Appalachian Power Co., an AEP subsidiary.

Brumley Gap would not be a substitute for the thwarted New River project, company officials argue. It would start operating in the mid-1990s or later, they say. The New River project was planned for the early 1980s and, officials say, the company has relied on coal-fueled plants to make up for any power shortage caused by its cancellation. Critics say the Brumley Gap project would cost more than $2.5 billion. Company officials concede a 3,000 megawatt plant could cost around $2 billion, but say a smaller one might cost less.

Opponents, backed by the Sierra Club and other environmental groups, claim to be making headway. They persuaded the Washington County Board of Supervisors to reverse its initial stand and oppose the Brumley Gap project. They are supported by the United Mine Workers union, whose members mine Appalachian coal. To finance their economic consultants' study, they raised nearly $50,000, including more than $20,000 in loans and grants from Catholic organizations.

Recently, two Virginia Republicans who represent the area, Sen. John W. Warner and Rep. William C. Wampler, stepped into the dispute, announcing that American Electric Power had agreed to study a possible alternative to the Brumley Gap plan--purchase of part-ownership in Vepco's Bath County project. Although opponents hailed the announcement as a turnabout, company officials say they do not want to raise "false hopes" and note that they would be required by FERC officials to study the Bath County option anyway.

"They're beginning to listen," said Sam Dickenson, a soft-spoken 60-year-old elementary school teacher who heads the Brumley Gap Concerned Citizens. "We're powerful."

The economic debate stems chiefly from conflicting forecasts for electric demand. The company predicts annual growth of 3.6 percent for the 1981-91 decade, a level it says reflects trends in the past five years. Nationally, industry groups say annual growth has averaged about 3.5 percent in the past seven years and predict 3.4 percent yearly increases during the 1980s.

But Energy Systems Research Group Inc., the Boston consulting firm hired by the protesters, rejects the industry's traditional forecasting techniques. It says use of electricity by American Electric Power's customers likely will rise by only about 2 percent a year through 1998 and could be cut to about one percent yearly through conservation. Its November 1980 report labeled the Brumley Gap project "unnecessary in this century," "economically unsound" and "conceptually wasteful."

In the Brumley Gap area, archeologists have found carved spearheads, pottery fragments and other relics indicating virtually continuous Indian inhabitation from about 6500 B.C. to 1600 A.D. The findings, they say, may allow researchers to trace patterns of prehistoric civilization--shifts from high mountain regions to flood plains, from migratory hunting bands to sedentary agricultural economies and from tribes to more complex societies with inherited chieftains and larger villages.

"This is what really makes it exciting," says E. Randolph Turner, assistant commissioner of the Virginia Research Center for Archeology.

The proposed plant, critics note, also would wipe out a state-managed wildlife area known as Hidden Valley. This wooded enclave encircles a mountain-top lake stocked with smallmouth bass, where coal miners fish on summer weekends. In addition, the spotfin chub, an endangered fish species, has been found in nearby rivers, though no closer than 60 miles downstream from Brumley Creek, the mountain stream that crosses Brumley Gap.

American Electric Power promises safeguards to protect archeological sites and limit environmental damage. But many Brumley Gap residents remain adamant. They have dotted their valley with freshly painted red-and-white signs, warning against trespassing and invoking Biblical proverbs. About 70 residents traveled to Washington this year to protest. They have started a $60,000 fund-raising campaign to finance court challenges. Some say they will try to block the company from drilling holes and digging trenches for its tests.

"They call this 'Big Mountain,' " said Cricket Woods, as she gazed 2,500 feet up at a peak in the Clinch range from the front porch of a her Brumley Gap home. She pointed to a craggy precipice, Pinnacle Rock. "On a clear day, you can see the crevice in it. It's beautiful." In Brumley Creek, she recalled, her 15-year-old son was baptized last October in a mass ceremony along with about 20 other young people.

"We've still got a chance," she said. "We trust the Lord. We believe that He'll save it . . . . He's kept us in the valley this long."