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Monday, August 8, 2005

The Interconnection Standard and Private Contracts
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One of the principal objections I have heard toward the regulatory framework report is the persistence of a separate interconnection standard or, as some have called it, an interconnection mandate.

First, I would emphasize that it is a standard, not a mandate. Under the framework, regulatory intervention to compel interconnection can only happen upon a showing of: "a substantial and nontransitory risk to consumer welfare by materially and substantially impeding interconnection" to a public communications network. Admittedly, the "public communications network" term is problematic, and I think the working group would be open to alternative terms. Principally, though, this standard does not mandate interconnection but first requires a showing of harm from failure to interconnect.

It follows from this first point that the first option for interconnection under this model remains private negotiation, such as now takes place on the Internet backbone. The framework's "unfair competition" standard only serves as a backstop to the private interconnection model, to be invoked only when refusal to interconnect is being used strategically to harm consumer welfare. This would then be quite similar to the general antitrust default rules in refusal to deal cases -- the presumption is that refusal to deal is OK, but there are certain market circumstances where it could be problematic.

Still, there remain concerns about how to treat interconnection. A friend of the Bell persuasion put it to me this way in an email:

Here is what I'm concerned about on the IP connectivity stuff. First and foremost, it probably can't be regulated at least without totally undermining current agreements and rendering IP peering and transit arrangements far less efficient and much more costly than they current are. The reasons for this are largely technical (how IP traffic is routed, who bears most of the responsibility for routing traffic, and the fact that the rates terms and condition of peering and transit agreements are worked out bilaterally and thus reflect the perceived value to each of only two carriers that are party to a given interconnection agreement (which again based in large part on who bears the responsibility and cost of getting packet flows from point A to point B). Regulation would no doubt destroy much if not all of that mostly because it would necessarily replace thousands of individualized (bilaterally negotiated) agreements with "one-size-fits-all solutions" mandates that are laced with a lot of "social engineering" thrown in to boot. It's also not clear whether 7,000 or so ISPs in the U.S. or for that matter 7,500 or so outside the U.S. that currently interconnect on an unregulated basis would sit still for the FCC much less the states imposing their personal political agendas on the IP interconnection process. At best it would be a knock down drag out war.

I am concerned that once you introduce any element of economic regulation into IP space (public safety is different) including, for instance, an interconnection obligation, you start mucking up the current commercial negotiation process possibly to the point of creating enough problems to warrant even more involvement by a bunch of nefarious regulators. It's not an unreasonable concern notwithstanding the merits of guarding against bad behavior under an unfair competition standard versus some technology-centric scheme that "walls off" IP in the hope that the wall will not spring leaks down the road.

One could also make the argument that as the Internet continues to grow and become an even more essential element in our national "fabric" we will soon get to a point where any suggestion that IP conectivity should be subject to economic regulation will simply be dismissed outright. At that point, of course, the anti-trust laws would continue to apply which pretty much gets you to where you want albeit without the interim risk of allowing the regulators to muck things up between now and then. What say you to that?

I think that the interconnection standard of the framework leaves intact those bilateral contracts of the Internet backbone, and contemplates that they would still remain the preferred method of arranging interconnection. Economic regulation of interconnection under this standard is contemplated, again, after a showing of harm to consumer welfare, not assumed beforehand as under the current interconnetion arbitration regime. Indeed, I cannot imagine a situation where a showing could be made in an all-IP environment to trigger the "unfair competition" definition in the working group report, save for instances where a party attempts to capitalize on a terminating access monopoly.

As a general matter, though, the all IP environment would be largely untouched by any ability for regulators to intervene, muck up, redistribute rents between parties. This is because an all-IP environment and the resulting "hot potatoe" routing and transit agreements make it very hard to acquire market power in the backbone, at least until a network provider can identify and thus disfavor specific packets.

I agree that continuing governmental involvement in interconnection relationships is to be disfavored, but also am convinced that there are a small set of circumstances where interconnection intervention might be warranted. Now, an alternative answer (for which I leave fuller explanations to James Gattuso) would be to have no interconnection obligation whatsoever and leave it all to default antitrust rules. This would obviate the terminating access monopoly problem, and force all interconnection in the first instance into the market. I have some sympathy for this, particularly given the mischief that can come by giving the regulators an opening to intervene here. Nevertheless, I think the working group tried to come up with a tight enough standard so that the interconnection obligations would be narrow, and not be a mandate.

posted by Ray Gifford @ 11:26 AM | Interconnection

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