The Chesapeake & Potomac Telephone Co., with renewed backing from Mayor Marion Barry, is seen by many city officials and industry experts as the favorite to win up to $20 million in contracts to provide telephone service to the D.C. government.

Barry's administration has struggled for nearly a year, since the breakup of the Bell system, to choose providers of telephone service for a new municipal office building at 14th and U streets NW and to replace existing city government service provided by C&P.

From the beginning, the process has been beset by false starts, bureaucratic infighting, ineptness and political intrigue.

The one constant throughout has been the city's seemingly dogged determination to stick with C&P, despite evidence that other firms could provide less costly and more technologically advanced service.

Last January, a five-member advisory panel of city officials unanimously recommended that the city award the municipal building contract to Rolm Corp., an IBM Corp subsidiary that specializes in telecommunications systems. C&P's proposal was rated third out of six submitted and was $400,000 more expensive than Rolm's.

The D.C. government disregarded the panel's recommendation and briefly sought to negotiate a contract with C&P and a sister company. Now the city has reopened the bidding process, with many observers betting that C&P will end up with the contract.

"I think there's a bias towards them C&P on the part of city government, for political reasons and for misguided and miscalculated assumptions," said City Council member Betty Ann Kane (D-At Large), chairwoman of the Public Services and Cable Television Committee.

Barry acknowledged at a news conference last week that the city botched the handling of the telephone contracts. The mayor placed much of the blame with Jose Gutierrez, a former cabinet officer who has accused the mayor and City Administrator Thomas Downs of trying to steer the contracts to C&P for political reasons.

Gutierrez, who until recently was the highest ranking Hispanic in Barry's cabinet as director of the Department of Administrative Services, was demoted to a low-level post in the D.C. Planning Office and now is the target of an internal investigation ordered by the mayor.

Gutierrez said last week that until his falling out with the mayor he was trying to work out a deal with C&P. He said he was doing so to try to accommodate the wishes of Barry and Downs.

"I was saying let's go with C&P, but let's get them to match their competitors ," he said. "But C&P would never match. They were always higher . . . . What I was trying to do was find a middle ground."

Gutierrez said that his staff, particularly his telecommunications consultant Thomas J. Mattingly, repeatedly came up with evidence that C&P's prices were high and that the Centrex system it was offering was not as up-to-date or versatile as the digital "PBX" systems offered by Rolm and other firms.

One of the drawbacks to the Centrex system that C&P wants to install in the municipal center is that, unlike PBX, it cannot be used to transmit data or create computer networks for electronic mail and other time-saving measures. But C&P officials say they soon will have a digital Centrex system that will possess all the capabilities of PBX.

The mayor said last week that the District may have no choice but to stick with C&P to help assure the financial well-being of the company, a major employer in Washington. Barry said he feared that if C&P's revenues began to shrink, the company might be forced to seek even higher telephone rates for residential customers than the major increases currently being sought.

"We have a responsibility to look at all aspects of every contract we give in terms of the social implications," Barry said. "So price and technology are not the only factors that you look at when you talk about telephones."

Some telecommunications experts and City Council members disagree, saying that the mayor is attempting to "shield" C&P and make excuses for the company's inability to compete with other firms on an equal footing.

"I have news for Marion Barry," said a congressional telecommunications expert. "People's telephone rates are already going up and their rate increases are based on C&P's shifting costs from government and business to residential so they can compete."

The expert, who asked not to be identified, said that under Barry's approach, D.C. residents would be squeezed by having to pay higher taxes for C&P's more expensive government telephone service and also pay higher residential phone rates.

Delano Lewis, a C&P executive vice president and longtime political supporter of Barry, said Saturday that his company is convinced that its Centrex business telephone service is the best and most economical system that the District can obtain. He said that C&P is pursuing an aggressive marketing strategy and is not attempting to exert political influence.

"This C&P is a business that has to survive in a competitive world," he said. "We are no longer a monopoly. There's nothing underhanded or illegal about my pushing Centrex."

Centrex accounts for 20 percent of C&P's total revenues. C&P is threatened with the loss of much of its current Centrex customer base because of competition from PBX systems, according to a recent finding of the D.C. Public Service Commission.

If C&P loses its Centrex customers in Washington, including the federal government, the D.C. government and private firms, residential rates would be boosted by about $5 a month, according to Philip A. Campbell, president of Bell Atlantic Management Services Inc., a subsidiary of Bell Atlantic Corp., which is the parent company of C&P.

In the wake of Gutierrez's allegations, Barry's administration has announced that it may wait up to two years, or until after the 1986 D.C. elections, before awarding contracts to replace city government telephone service.

However, should C&P be awarded the contract to install telephones in the new municipal center this summer, the company would have a leg up in its pursuit of the government-wide contract, with ample time to update its technology to compete with Rolm and other firms that offer PBX.

Gutierrez said he began having discussions with Downs about the need to award the contracts to C&P shortly after becoming head of the department a year ago. Later, Gutierrez said, he had several luncheon meetings with the mayor in which C&P was discussed. According to Gutierrez, the mayor kept hinting that he wanted the city to stick with C&P.

In a July 31 memorandum prepared for Gutierrez, one of his assistants recommended that the city either purchase a telephone system for the municipal center from AT&T or buy or lease the phones from C&P. Gutierrez made a notation on the memorandum to: "Go with C&P. Get them to match ATT offer."

Gutierrez said that his staff subsequently determined that the city would have to seek competitive proposals for the contract, so he instructed that an RFP, a formal request for proposals, be issued both for the municipal center and a new city government telephone system. Six companies submitted proposals. Some major firms, including General Telegraph & Electronics Corp. (GTE), did not participate.

Consultant Mattingly said that when he started working for the city on Oct. 29 he quickly concluded that the formal request had been poorly drawn and recommended in a Nov. 5 memorandum that the city scrap the bids and start over, but concentrate only on the new municipal building.

Mattingly said he learned later that his concern had not been passed along to Gutierrez and a panel of five D.C. officials had been organized to review the contract proposals.

On Jan. 4 the panel, including Donnie L. Bryant, an assistant to Downs, recommended that the city spend $1.4 million over a 10-year period to purchase the Rolm system for the municipal center and cancel the request for proposals for the citywide system.

In mid-to-late January, Gutierrez said, Downs twice told him to meet with Lewis, the C&P vice president. The meetings were held at the Mayflower Hotel, and Gutierrez described them as part of a campaign by Lewis, Downs and Barry to get the city to go with C&P for political reasons.

Lewis confirmed that he attended the meetings, but he said that Gutierrez was being "ridiculous" in claiming that Lewis tried to exert political influence.

"His allegations that I was going to the mayor and Tom Downs are completely false," Lewis said.

Lewis said that he had arranged the two meetings with Gutierrez directly, and he denied that Downs had helped to set them up. He said he wanted to talk to Gutierrez because he was concerned that Gutierrez was not getting the full story on the merits ofC&P's proposal.

Gutierrez said that even after he realized that Rolm's system was the best for the new building, he tried to accommodate C&P by offering to purchase a similar PBX system through C&P from a sister company called Bell Atlanticom Systems Inc.

"I was trying to see if C&P and Bell Atlanticom could give us a PBX sytem" at a price similar to the one offered by Rolm, he said.

On Jan. 18 Gutierrez canceled the city's request for proposals for both the District government system and the municipal building, and he instructed his staff to begin negotiations to purchase a PBX system for the municipal building through C&P and Bell Atlanticom, which sells PBX systems. Then, on Jan. 29, Gutierrez took the unusual step of signing a proposed purchase contract that his staff had prepared for him and sending it to Bell Atlanticom and C&P for their approval.

In a letter to Gutierrez dated Feb. 1, Lewis responded that it would be "inappropriate" for C&P to accept an agreement on behalf of Bell Atlanticom.

Around that time, Lewis said, he received his first telephone call from Downs, who sought information about the contract that Gutierrez had drawn up and sent out on his own. Downs and Gutierrez had been feuding for months over a number of issues, and Downs apparently had been left in the dark about the contract proposal.

Lewis said that after checking into it, he told Downs what he knew and reiterated that he thought the District was making a mistake by not buying C&P's Centrex system.

An official close to Downs said last week the city administrator was concerned that Gutierrez was not adhering to proper procedures and, by negotiating directly with C&P and Bell Atlanticom, might be leaving the city open to lawsuits from competitors.

The official contends that Gutierrez, not Downs, was pushing for C&P. This official cited the July 31 memo in which Gutierrez urged his staff to go with C&P, and the fact that Downs' representative on the evaluation panel, Donnie Bryant, voted for Rolm and ranked C&P third.

Following the demotion of Gutierrez, Barry announced that he would appoint a blue-ribbon panel to chart the course of the city's telecommunications needs. He has not yet made any appointments to the panel.