The District of Columbia Public Service Commission froze the electric bills of small customers yesterday and threw out most of the rate increase asked by Potomac Electric Power Co.

Instead of the $44.8 million rate increase asked by Pepco, the commission agreed to a mere $5.8 million increase and ruled that small users of power need pay nothing more.

The decision means the average Pepco customer in the District will pay only 79 cents more per year for electricity.

The average electric bill will go up by only 6.5 cents a month - less than recent increases in the price of a single gallon of gasoline.

Yesterday's decision, however, applies only to the basic rates charged for electric service. Because Pepco is allowed to pass on to customers any increases in fuel prices, bills still may continue to increase.

PSC ruled that no increase was justified in the bills of customers who use less than 450 kilowatts of power a month, slightly less than the average D.C. residential use of 500 kw.

The commission also ordered a complex change in accounting rules that potentially could save consumers millions of dollars.

Reversing a 30-year-old policy, the PSC said Pepco no longer can charge customers for power plants still under construction. Only when the plant is completed can Pepco pass the cost on to consumers, the PSC said.

Consumers eventually will have to pay for new power plants, the PSC ruled, but it prevented Pepco from "saddling present rate-payers with costs that should more appropriately be borne by future consumers."

Pepco officials said they are considering ways of overturning the PSC decision, which they said does not allow the power company to make a reasonable profit.

"The commission is permitting a 2 percent increase, but inflation and our cost of doing business have increased tremendously," said Paul Dragoumis, senior vice president of Pepco.

Rejection of Pepco's sharges for construction work in progress (CWIP) was "a major victory for consumers," said D.C. People's Counsel Brian Lederer.

Lederer, whose office was created by Congress to represent consumers in utility rate cases, spent $400,000 challenging Pepco's bid for higher electric rates, and was repeatedly criticized by Pepco for spending so much money.

"Four hundred thousand to save forty million - that's a pretty good investment, I'd say," Lederer commented.

The PSC also agreed with Lederer's contention that Pepco was not entitled to make a higher return on its investment in power plants and facilities. Rather than increase Pepco's rate of return to 9.91 percent as the company asked, the commission kept the rate at 9.25 percent.

Complaining that the PSC decision "will discourage investment in the District of Columbia," Dragoumis said the ruling "appears to be contrary to what the administration [of Mayor Marion Barry] is saying" about encouraging business in Washington.

The rejection of Pepco's CWIP charges, he added, is "a one-time accounting procedure that allows rates to remain artificially low today and requires large increases in the future."

Lederer, however, contended that Pepco is one of only three utilities in the country that charge customers for plants that are not producing power.

The PSC ruling still allows Pepco to collect CWIP charges for pollution control equipment and required environmental facilities.

Pepco's request for higher rates had been pending before the PSC for 23 months and both the power company and the people's counsel had complained about the long delay.

Although the PSC is unlikely to change its mind after such a lengthy decision-making process, Pepco still has one more chance to file objections to the ruling. If the company does object, the PSC will hold another hearing on June 27 before making the ruling permanent.