A Virginia utility hearing examiner recommended today that a Virginia Electric & Power Co. rate increase of $81 million be cut sharply to $18 million and that customers receive refunds on the portion of the higher rates that have been in effect since Aug. 29.

In a 46-page report, State Corporation Commission examiner Stewart E. Farrar said that Vepco's financial condition was much better than company officials had described, and that the smaller amount "would be fair and reasonable in this case."

Vepco originally had sought a rise of $175 million, but that amount was reduced to $81 million during the summer by the SCC.

Under a provision in the state law, the $81 million increase went into effect at the end of August after the SCC failed to rule on the issue within 150 days.

Vepco officials today declined comment on the examiner's report. Vepco and other participants in the case have 15 days to file responses to the examiner's findings.

If the three-member commission accepts the recommendation, Vepco would have to refund any overcharge, with interest. Such a refund would amount to about $4 for an average customer if the commission were to rule by the end of October, an SCC spokesman said.

The $81 million increase was partially offset by a $58 million reduction in fuel charges passed on by Vepco, company officials said. Vepco said that average customer billings increased by about $1.88 per month.

Consumer groups, which vigorously opposed the increase at public hearings, also objected to the imposition of the higher rates in August.

Farrar's suggested $18 million increase is slightly lower than the $19.7 million proposed by the state attorney general's consumer office. An earlier SCC report had recommended that Vepco get no increase.

The company last received a rate increase in August 1982.

Vepco said that the new increase was needed to offset inflationary operating expenses, protect its investment ratings and help recover the cost of building its canceled North Anna 3 nuclear power plant.

Consumer groups have charged that Vepco overpays its top management and has failed to take necessary cost-cutting measures.

Farrar's report also criticized Vepco for contributing $112,000 to the Committee for Energy Awareness, a pro-utility organization that Farrar said "is a public relations effort on a wide front." Farrar said that this money should not be paid at the expense of the ratepayers.