You are describing peering arrangements between ISPs quite well. The ISP that is sending the traffic will "hot potato" the packets to the closest peering port,

You are describing peering arrangements between ISPs quite well. The ISP that is sending the traffic will "hot potato" the packets to the closest peering port, so the ISP receiving the traffic is responsible for backhauling it. This is why there is a convention of charging for traffic sent between tier 1's. If it's a wash, then it's a wash. Otherwise, whoever sends more pays more. However, this is not how peering arrangements look between a CDN and an ISP. In that case, the CDN is responsible for the backbone traversal, because the CDN is proxying requests or delivering them from cache, at the local peering point relative to the consumer. In your example, if you are in boston accessing content with an origin in california, your ISP will receive the data in boston, and will not have to backhaul the traffic from california. The CDN will take care of that.