The embattled D.C. Taxicab Commission's rates panel dug in its heels yesterday, refusing to take steps that might have revived its planned 40-cent taxi fare surcharge, which was declared invalid Monday by the D.C. corporation counsel.

By a 3-to-2 vote, the panel on rates and rules refused a petition signed by about 1,000 cabdrivers who sought a fresh review of a 23 percent fare increase. Corporation Counsel Frederick D. Cooke Jr. had blocked the flat 40-cent fare increase, originally scheduled to take effect yesterday, on the grounds that panel members failed to give weight to evidence supporting the larger increase.

Meanwhile, the D.C. Council yesterday gave final approval to a bill that would shift ultimate authority on rates and rules from the five-member panel to the full 12-member commission.

But Arrington Dixon, the taxi commission chairman who requested the legislation, said he did not know whether decisions on rates by the full commission would be any different from those of the five-member panel.

D.C. Council member Betty Ann Kane (D-At Large), architect of legislation that created the commission, said she is confident that the legislation giving final rate-making authority to the full commission will help resolve the controversy surrounding the rates panel.

"I didn't {create the commission} to be a joke," Kane said. "The potential is there to have it work very differently now . . . . I think we should give the chairman the chance to use the leadership he asked for. The ball is now in his court."

The commission is composed of 12 citizens with various political allegiances who were appointed by Mayor Marion Barry after negotiations with council members.

Following the rates panel's decision yesterday not to review the higher fare increase, taxi owner Dan Smith said The Joint Industry Group, an organization supporting a higher increase, plans to sue the rates panel.

"It's a waste of money and time. And certainly the cabdrivers and citizens deserve better treatment than they've been getting from this rates and rules panel," Smith said. "This is unfortunate and it shouldn't have happened."

The 40-cent fare increase, which would have been the first in three years, was intended as a temporary measure to offset rising operating costs and an increase of about $30 a month for driver liability insurance scheduled to take effect in June.

The panel's vote yesterday -- capping months of hearings, maneuvering and sometimes acrimonious infighting among panel members -- came as a bitter disappointment to cabbies who had hoped the year-old taxi commission would take decisive action on fares and other issues that have divided the industry for years.

Differences within the taxi industry over a fare increase were reflected in the rules panel's sharp debate, which has been dominated by a three-member majority -- Joseph Becker, John Jessamy and Lucille Johnson -- that turned aside recommendations for a hefty percentage increase and substituted instead the 40-cent surcharge.

Yesterday some viewed the outcome of the interim fare increase as a victory for elements in the industry who have resisted change.

"I think there is clearly an indication that some folks on the panel don't want a {fare} increase," Dixon said. "In a very strange way, the status quo has been protected by forcing the process for seven months."

Commission member William J. Wright, president of the Taxicab Industry Group and a leader of an industry faction that resisted formation of the commission and has fought large fare increases in the past, said he was "disappointed" that the 40-cent increase had been stymied. But Wright said he hoped the rates panel could revive it.

Wright, who many contend has helped guide the panel's controversial actions behind the scenes, blamed the commission's problems on Dixon. "The chairman is totally responsible for delays," Wright said. "He ought to be a man and take credit for what he's responsible for."