Regulating interconnection: The FCC has a role to play, but it’s more limited than they’d like

June 9, 2015

Daniel Lyons

Tech Policy Daily

Barring a stay, the FCC’s Open Internet order is set to take effect later this month. And although much of the analysis thus far has focused on the rules regulating traffic over last-mile broadband networks, the most far-reaching aspect may prove to be the commission’s decision to regulate interconnection. It is also perhaps the most surprising aspect. Since launching its net neutrality proceeding in 2009, the commission repeatedly insisted that it had no desire to regulate the Internet. As late as mid-2014, Chairman Tom Wheeler explained that interconnection is “not a net neutrality issue” and a commission spokesman clarified that “[p]eering and interconnection are not under consideration in the Open Internet proceeding.”

While the commission’s abrupt change of position may prove fatal on judicial review, the Open Internet order is correct about two things. First, interconnection is an important issue, and second, the commission should play a role in its oversight. That is the focus of my most recent Perspectives article, published last week by the Free State Foundation. The article discusses the reasons why commission oversight may be useful:

The Internet is not a single network, but a collection of several thousand autonomous networks, working together to move packets from origination to delivery.

Interconnection agreements fuse those networks together, and therefore are vitally important to the health of a robust Internet. Denser, more interconnected networks help promote the Internet as a tool for expression, news, education, and communication – all socially valuable activities that public policy should facilitate.

As in many areas of the economy, interconnection offers some incentives for anticompetitive abuse. There are many benign reasons why one network may refuse to interconnect with another – perhaps most obviously, to pressure a sending network into assuming the direct or indirect costs of offloading its traffic onto a receiving network. But some networks may also be tempted to deny interconnection as a strategy to restrict competition in a way that harms consumers… [N]etworking innovations have reduced the opportunities for such behavior, but the potential for such abuse demands some regulatory oversight.

But unlike other areas of the economy (including net neutrality), it is unclear that traditional antitrust law alone is sufficient to remedy these concerns. […]Moreover, the commission itself effectively diminished whatever power antitrust law has over interconnection markets by reclassifying broadband providers as common carriers, [a move which] stripped the Federal Trade Commission of jurisdiction to investigate broadband providers’ practices under the FTC Act. For these independent reasons, it is not objectionable for the FCC to step into the gap that its reclassification decision created, to assume the mantle of policing interconnection markets for anticompetitive abuse.

While some agency oversight is probably appropriate, the article goes on to explain that its role should be different, and more limited, than that envisioned by the Open Internet order.

[T]he commission should operate as a type of sector-specific antitrust authority, intervening in significant instances where there is credible evidence of anticompetitive harm, but otherwise allowing a robust interconnection market to evolve along with the changing Internet ecosystem.

The commission should adopt an intervention standard informed by antitrust principles, commensurate with the notion that anticompetitive concerns comprise the primary justification for regulating in this space. In a typical anticompetitive foreclosure case, the government would have to prove that the defendant has market power and that the conduct in question has an anticompetitive effect. Similarly, the commission should not intervene in an interconnection dispute absent a finding that one of the parties has market power. Given the rise of multi-homing, such findings should be rare. Multi-homing is the concept that content and transit providers rely upon multiple providers to deliver traffic to Internet endpoints. The existence of multiple entry points into a network reduces the likelihood that a network can exercise market power in a way that forecloses traffic.

Intervention should also be limited to disputes that exhibit at least the potential for sustained consumer harm. The sustained modifier helps distinguish instances in which market evolution is messy and causes some transient interruption to consumer service. Such disruptions may be regrettable but do not alone rise to the level justifying regulatory intervention. As noted above, market transitions can be messy affairs, and the commission should avoid the temptation to ride to the rescue any time consumers or competitors claim to be adversely affected by sharp practices within a changing market.

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