A bill before the D.C. City Council that would require developers to pay up to $3,000 to every business displaced by the closing of a street or alley was criticized yesterday by business groups and Mayor Marion Barry's administration as inadequate to cover relocation costs.

Under the bill, introduced by Council Chairman David A. Clarke, developers who apply to the city for permission to close an alley also would have to offer businesses a preferential opportunity to return to a new or rehabilitated building, provide a market survey listing alternative locations, and help merchants negotiate new leases.

Yesterday, some of the witnesses who testified before the committee of the whole praised the bill's concept, but questioned whether it would have a significantly beneficial impact on displaced merchants.

Madeline M. Petty, director of the D.C. Department of Housing and Community Development, said that her department has spent a total of $4 million to relocate about 150 businesses during the last six years. Although the average payment for relocating those businesses was $25,000, the department's expenditures ranged from $2,500 to $150,000 for a single business, she said.

Petty said that the $3,000 moving payment proposed in Clarke's bill would be inadequate to relocate some businesses, but would be "welcome and meaningful assistance." But she noted that the bill could have a negative impact on development in the city because the required assistance could become a deterrent to potential developers.

Clarke, who said he is not opposed to increasing the level of compensation, said he is opposed to having taxpayers compensate merchants after the city closes an alley or street at the request of a developer. Clarke said he was "sort of insulted" that the administration's testimony amounted to saying that "the bill is neither good nor bad," while failing to suggest a dollar amount for relocating businesses.

George Frain, secretary of the 18th and Columbia Road Business Association, said the proposal would create an unfair level of compensation for businesses displaced by alley closings when the District government pays thousands of dollars more for businesses forced to move due to urban renewal projects.

"A fair and evenhanded government does not provide for two such levels of payment," Frain said.

Steve Linn, of the Downtown Retail Merchants Association, said his group believes "the bill simply falls far short of what is needed to help small retail businesses."

Linn said a comprehensive approach is needed, and he would prefer that the City Council let the D.C. Downtown Partnership, which has been studying the problem for a year, suggest solutions.

Witnesses from the D.C. Building Industry Association and Linowes & Blocher, a law firm that represents developers, focused on amending the bill to limit the tenants entitled to relocation compensation to those who have not already sold their property to developers.

In addition, both groups questioned the wisdom of giving tenants "preferential opportunity" to lease space in a new building at their former site.