Randford Gas with E&E Powerline from New Brunswick, Canada used a chainsaw to cut a new utility pole to the right height on 41th Avenue on Wednesday, July 4 in University Park, Md. Gass and other members of the crew drove two 15-hour days to get to the area to help PEPCO restore power after last month’s derecho. (Mark Gail/THE WASHINGTON POST)

Maryland regulators rejected the bulk of a rate increase sought by Pepco on Friday, three weeks after a storm knocked out power to hundreds of thousands and led to widespread outrage — again — over the length of time the power company took to restore electricity to its customers.

The state’s 530,000 Pepco residential customers will face an average increase of $2 per month. But for Pepco, the ruling marked the second time in seven months that state officials slapped the utility for chronic poor performance, saying additional revenue to pay for overdue improvements and to compensate stockholders would have to come from somewhere other than ratepayers.

Pepco could soon face additional financial woes. Regulators in the District have yet to rule on a similar rate-hike request, and under recently enacted legislation, Maryland could for the first time fine the company if it finds fault with Pepco’s response to the June 29 derecho storm.

The commission made its decision based on information from before the storm. But politically, the issues had become inseparable, with lawmakers all the way up to Gov. Martin O’Malley (D) feeling political heat in recent weeks to appear tough on Pepco and other state-regulated utilities.

Raquel Guillory, a spokeswoman for O’Malley, said the ruling by Maryland’s Public Service Commission would “send a message” that the state is holding the company responsible.

“The decision seems to represent the balance of two critically important realities,” Guillory said. “Pepco, along with its shareholders, must take responsibility for the company’s prior failings . . . and at the same time, you have to make sure they are able to invest in the infrastructure needed.”

A Washington Post investigation found that in 2010 Pepco ranked near the bottom nationally among electric companies in its ability to keep the power on and restore it after outages. Last year, the state levied what it called its largest fine ever on the utility, charging it $1 million for failing to trim trees and fix other problems that led to the frequent outages.

State Sen. Brian E. Frosh, a Montgomery County Democrat who lost power in his home for five days following last month’s storm, disagreed with O’Malley’s office. He said even a $2 increase, which goes into effect immediately, amounted to an illegitimate victory for Pepco.

“It’s unfair to ratepayers and sends a terrible message,” said Frosh, who made headlines recently by saying he would like to see state regulators fine Pepco and Baltimore Gas and Electric more than $100 million each for storm-related outages from last month.

“Any more money from ratepayers tells Pepco it can continue getting away with third-class service and get first-class compensation,” he said. “You have to provide reliable service, that’s Job 1, or shareholders shouldn’t benefit.”

Under the ruling, Pepco will annually collect $18.1 million of the $68 million it sought, which would have amounted to roughly $5.50 for the typical residential customer, according to the PSC. The rate increase was the first in three years.

The ruling also slightly reduced the company’s allowable return to shareholders to 9.31 percent, from 9.83 percent. Pepco had sought a requested return of 10.75 percent.

The portion of the rate hike that the commission rejected included nearly $8 million in expenses that the PSC deemed as “catch-up” improvements to cover “past failures to maintain a reliable electric system.”

The commission also denied a plan that would have allowed Pepco to create new “pre-payment” surchages for future system upgrades.

“Overall, the commission found that Pepco’s application lacked the evidence required to substantiate its request,” the PSC said in a statement. “The Commission considered instead its longer history of substandard performance.”

Because the storm hit after the commission had gone into deliberations on the rate hike, Pepco’s performance was prohibited by law from being factored into the decision.

The PSC said it was required to approve some form of rate hike to cover appropriate levels of infrastructure investment and to pay for the company to comply with new regulations designed to prevent accidental electrocutions.

The decision aligned more closely with consumer advocates’ groups than industry. The Office of People Counsel, for example, recommended that Pepco had a justified claim to an increase of just $13.6 million.

This was not the first time recently that the commission denied most of Pepco’s rate request. In 2006 and 2009, regulators rejected more than 70 percent of what Pepco wanted.

The commission also said Pepco officials were tone deaf when they failed to explain how much of the increase they were seeking was an attempt to make up for historic neglect — an accounting the commission wanted. Ignoring that request “makes us wonder if the Company heard us.”

Reactions across the Maryland suburbs, which have been hit hard by a series of protracted Pepco outages since the 2010 “Snowmageddon,” ran the spectrum Friday.

Opponents who pushed for the full rate-hike denial were tepid in their support.

“While we would have preferred no increase at all, we’re happy that the PSC at least did not give them the full amount,” said Tammy Bresnahan, a lobbyist for AARP Maryland.

Del. Tom Hucker (D-Montgomery) was less impressed. He, too, said the PSC should have denied the entire increase.

“They should have denied it out of hand. . . . It absolutely sends the wrong message to the public [that] they are proud they denied most of it.”

Montgomery County Council President Roger Berliner (D-Potomac-Bethesda), however, one of Pepco’s most outspoken local critics, said the commission made an important call: “I think the commission recognized it was in peril of losing public confidence. It was going to draw the line, here, now.”

A Pepco spokesman declined to comment. Anthony J. Kamerick, Pepco Holdings’ executive vice president and chief regulatory officer, said in an interview last month that the company might file another rate increase later this year if it did not like the ruling.

Mary Pat Flaherty and Jennifer Jenkins contributed to this report.