Letting the government regulate peering will be the death of the internet as we know it.

I don't believe that there's a single lawmaker, anywhere in the world, who understands anything about the fundamentals of IP transit. But no doubt they have ISP buddies who understand everything about it, and no doubt they'll be the ones actually writing the legislation.

Well, there is always a regulatory measure that would be a lot easier to implement: Lawmakers could just disallow Tier 1 carriers to provide consumer Internet access. (This forced separation of business domain already has precedent in other sectors, e.g. energy companies having to separate network upkeep from energy trading or banks having to split their investment branch from the credit branch)

And I have a feeling that as soon as that is seriously discussed, the current exploitation of market power will stop rather quickly, without any need for actual regulation.

Governments successfully managed this before. It was called Local Loop Unbundling.

They recognised where the monopoly was: the incumbent telcos with millions of customers that had to go through them to get anywhere else.

So the government insisted that such incumbents make available space in their exchanges for third parties (not for free!), and to allow their customers to use the third parties for telephone and/or internet service, rather than themselves.

A similar argument and regulation could be made today. It could only apply to ISPs with a significant number of endpoint customers. It could require that the ISP make peering available to third parties, at the third party's cost, but the resulting transit should be settlement-free. It could require that if a peer asks the ISP to upgrade, because the ISP is deliberately underprovisioning, the ISP is compelled to allow the third party to pay reasonable costs to upgrade both sides (so the ISP can't sit on its hands, can't brazen it out, and can't set an impossible price)