Interstate Commerce Commission Chairman A. Daniel O'Neal called on the railroad industry yesterday to begin using some of its existing freedoms to compete before it seeks total deregulation -- a solution he contended may well spell its eventual doom.

In a speech prepared for delivery to the National Council of Farmer Cooperatives, O'Neal criticized "most" railroads for continuing to retreat from competition -- giving up "one commodity after another" to their trucking, barge and pipeline competitors -- instead of seeking to improve their service reliability and exploiting some of their natural advantages.

Although Congress passed legislation almost three years ago giving the railroads greater freedom to raise and lower rates and limiting their regulation by the ICC, O'Neal complained that "we don't know if the act has worked because the railroads have not really used it."

He rejected railroad claims that they haven't used the legislation because of a too-strict commission, noting that the ICC has stopped only 15 rate increases from taking effect out of thousands filed. And the railroads haven't used its provisions in a way to establish new pricing, marketing and operating strategies that would allow them to become more competitive, he charged.

In seeking deregulation, the railroads are not leally complaining that the ICC has prevented them from competing but that it has not given them more freedom where they don't need to compete at all -- where they have monopoly power, O'Neal suggested.

They want to raise the rates paid by the so-called captive shippers -- the shippers of coal and grain, for example -- those with no real choice of competitors, he said.

Total freedom to raise rates could backfire though, O'Neal warned. Those shippers are "captive" right now because, under present conditions, it is too impractical for any other mode of transportation to provide the service, he suggested.

"But this strategy of hiking rates to captive shippers has its limits," he warned. After a while, the cost of moving that commodity by truck to a water port or moving it entirely by truck may become more reasonable for some shippers; others may go out of business or, if feasible, move.

"And the railroads will have priced themselves out of much of the market, rail traffic will decline further and the railroads will have taken another step toward oblivion," he cautioned.

Although the ICC will seek to reduce regulatory burdens on the railroads, it will not allow the railroads to exploit the captive market, "most particularly when they have not fully tried hard enough to make money in the competitive market," O'Neal said.

He challenged the railroads to develop and propose innovative rates; if the ICC rejects them, they will have made their case for new legislation, he said. But before they are given greater freedom to do what they want the railroads should demonstrate that they have used the resources and freedom already available to them to improve their financial situation, he said.