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Perspectives from FSF Scholars           May 19, 2015

  


Regulating Interconnection (Lightly!)

 

by

 

Daniel A. Lyons

 

[Below is the Introduction and Conclusion to this latest FSF Perspectives. A PDF version of the complete Perspectives, with footnotes, is here.]

 

Introduction

 

Of the many potential land mines lurking in the Open Internet order, perhaps the most surprising is the Commission's assertion of jurisdiction over interconnection agreements. When he first launched the net neutrality proceeding in 2009, then-Chairman Julius Genachowski was quick to snuff out any concern that the Commission sought to regulate the Internet. He explained to anyone who would listen that the FCC was interested only in the "on-ramps to the Internet," the last-mile broadband networks that connect end-users to the network. Similarly, the 2014 Notice of Proposed Rulemaking tentatively concluded that the Open Internet rules should not affect agreements for the exchange of traffic between networks. Although the Commission invited comments on this conclusion, Chairman Tom Wheeler explained during the comment period 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."

 

But changing dynamics within the Internet ecosystem, specifically the rise of over-the-top video as the single largest driver of Internet traffic, brought interconnection disputes increasingly into the public's eye in 2014. Policymakers and advocates grew concerned that ISPs could use interconnection disputes to make an end-run around net neutrality restrictions. These concerns were fanned by Netflix, generator of up to one-third of peak-time Internet traffic, which sought regulatory intervention to correct its failure to negotiate settlement-free interconnection agreements with several prominent ISPs. As a result, the Open Internet order explicitly grants the Commission potentially broad authority to review broadband providers' interconnection practices and to hear interconnection-related complaints filed by consumers.

 

In part because of this about-face, the interconnection provisions may be one of the portions of the Open Internet order most vulnerable to reversal on judicial review. But a reversal on procedural grounds does not address the issue of what role the Commission should play when governing interconnection in a Title II world. Interconnection is an important issue, and the FCC should play a role in its oversight -- particularly since reclassification has displaced the FTC's antitrust authority over broadband providers -- but not necessarily the role that the Open Internet order and various commenters contemplate. Rather, the 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.

 

Conclusion

 

Interconnection disputes are likely to occur from time to time, coinciding with changing consumer behavior and the consequent effect these changes have on the flow of bits across networks. The Commission is correct that it is premature to develop a comprehensive regulatory response to this phenomenon. But the discussion above yields three key nodes around which the Commission should begin building its policy.

 

Transparency

The Commission should begin by attempting to gather more information to understand how interconnection markets work. When faced with Netflix's complaints in early 2014 that paid peering posed a threat to the Open Internet, the Commission appropriately responded by asking for copies of the interconnection agreements in question, to develop a better understanding of how these markets work. The Open Internet order suggests that the learning curve is steep, and the agency has not yet satisfied itself - or many other observers - that it understands the complex dynamics at work in this market. Before undertaking a comprehensive law of interconnection, under Sections 201 and 202 or otherwise, the Commission should gather additional facts to understand better the dynamic nature of this market and where the potential for anticompetitive abuse may lie.

 

It is worth noting, however, that this does not, and should not, justify a policy to make the details of these agreements public, as some advocates have suggested. Interconnection agreements are generally governed by nondisclosure agreements and could contain valuable trade secrets that individual networks seek to remain confidential. As I have discussed at length in an earlier Perspectives from FSF Scholars release, antitrust law has long warned that the disclosure of competitively sensitive information among rivals can facilitate tacit collusion, and even absent collusion, revealing price and cost information can have an adverse effect on competition. The Commission should reject calls to mandate the public disclosure of individual interconnection agreements.

 

Intervention

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.

 

This is likely a narrower standard than that afforded by the Title II "unjust or unreasonable practices" standard-and much narrower than Section 201(a)'s public interest standard for regulating interconnection practices. But these modest guideposts fit what ought to be a display of humility on the Commission's part when discussing interconnection markets. Given the robust competition in this space and the speed with which interconnection agreements respond to fluid market conditions, regulatory intervention should be the exception rather than the rule. For the Internet to grow and develop in response to changing consumer demand, network providers must be given significant flexibility to draft appropriate interconnection agreements, even if dynamic new terms differ substantially from existing practices. An antitrust-like standard preserves the space for that evolution to occur while still providing sufficient authority for the Commission to block practices that harm consumers and competition.

 

Remedy

Upon finding that a particular dispute or practice is harmful, the agency's primary recourse should be to refer the parties to private negotiation. Perhaps the first step should be to order mediation, and if that fails, require the parties to attend mandatory arbitration to resolve their disputes. Private ordering is preferable to Commission-imposed interconnection because of the complexity associated with interconnection. Interconnection agreements can involve several different practices, and can themselves represent only one facet of the full relationship between the two parties. Once a problem is laid bare, the parties have a wide range of tools with which to find consensus, especially when prompted by an effective dispute resolution specialist. This means that a privately negotiated solution is likely to be more efficient than one imposed by the regulator from a more limited set of options.

 

By asserting jurisdiction over interconnection disputes, the Commission opened a brave new world in Internet regulation. The Open Internet order's supposed caution and humility with regard to this issue is encouraging, at least if taken at face value. The discussion above is not meant to comprise a robust jurisprudence of interconnection disputes, but rather a set of first principles meant to guide the Commission as it first dips its toes into interconnection waters. The Commission's first steps should be to gain a better understanding of interconnection markets, and intervene only in instances of anticompetitive harm to prod the parties to negotiate a solution. In this way, the Commission can protect consumers from legitimate harm while minimizing the risk that intervention would otherwise pose to the continued health and stability of the Internet.

 

* Daniel A. Lyons, a Member of the Free State Foundation's Board of Academic Advisors, is an Associate Professor of Law at Boston College Law School.

 

The Free State Foundation is an independent, nonpartisan free market-oriented think tank located in Rockville, Maryland.

 

Read the complete Perspectives, with footnotes, here.

 

 

     

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