SICE-WTO- Mexico - WT/DS204/R

WORLD TRADE
ORGANIZATION

WT/DS204/R
2 April 2004

(04-1211)

Original: English

MEXICO � MEASURES AFFECTING
TELECOMMUNICATIONS SERVICES

Report of the Panel

(Continued)

2. Whether Mexico has fulfilled its interconnection commitment, in Section 2.2(b) of its Reference Paper, with respect to the services at issue

7.145 We now consider whether Mexico has fulfilled the commitment contained in Section 2.2 of its Reference Paper, notably to ensure, with a major supplier, cost-oriented interconnection. We consider first the preliminary issue of whether Telmex is a "major supplier".

(a) Is Telmex a "major supplier"?

7.146 The United States claims that Mexico has not met its commitment under Sections 2.1 and 2.2 of its Reference Paper because it has failed to ensure that Telmex, a major supplier, provides interconnection to United States basic telecommunications suppliers on a cross-border basis with cost-based rates and reasonable terms and conditions. Mexico refutes this claim and also contests the United States assertion that Telmex is a major supplier.

7.147 We examine first the definition of the term "major supplier", as it appears in the Reference Paper:

"A major supplier is a supplier which has the ability to materially affect the terms of participation (having regard to price and supply) in the relevant market for basic telecommunications services as a result of:
(a) control over essential facilities; or
(b) use of its position in the market."⁹²⁴

7.148 It is not in dispute that Telmex is a supplier of basic telecommunications services. In order to determine whether Telmex is a "major supplier", Mexico's Reference Paper indicates that we must examine three factors. First, what the "relevant market" is. Second, whether, in that market, Telmex has "the ability to materially affect the terms of participation (having regard to price and supply) in that market". Third, whether that ability results either from "control over essential facilities", or "use of its position in the market". We consider each of these factors in turn.

(i) What is the "relevant market for basic telecommunications services"?

7.149 The United States argues that the relevant market is the termination of the services at issue � voice telephony, facsimile and circuit-switched data transmission services � supplied cross-border from the United States to Mexico. According to the United States, this results from an application of basic principles of United States antitrust law and Mexican competition law, which define the relevant market in terms of demand substitution. Under this principle, it contends that international telecommunications services (whether supplied cross-border or through commercial presence) cannot substitute for domestic telecommunications services. Likewise, within international telecommunications services, originating traffic cannot substitute for terminating traffic, which is a separate market.⁹²⁵

7.150 Mexico contests this analysis. It argues that the United States fails to explain how the supply of cross-border services is relevant to the market for termination, which are supplied through commercial presence, a different mode of supply. Even if the market for termination were in principle relevant, Telmex does not provide such services, and Mexico does not permit trade in them. Instead, it argues, Telmex completes international calls on a shared-revenue basis, under a traditional accounting rate regime, and the relevant market would thus have to include two-way traffic.⁹²⁶

7.151 The services at issue are basic telecommunications services � voice, switched data and fax � originating in the United States, and for which United States suppliers are seeking interconnection with Mexican concessionaires for termination of the service in Mexico. United States suppliers have a choice of Mexican operators with whom they may interconnect and terminate, even though these operators, by Mexican law, must charge a single price set by the operator with the largest volume of outgoing traffic, and Telmex controls the majority of international gateways necessary to terminate the services. Contrary to Mexico's arguments, therefore, there does exist supply and demand � a "market" � in Mexico for termination. The fact that arrangements for interconnection and termination may take the form of "joint service" agreements, and may not be price-oriented, does not change the fact that the market exists. Nor is it pertinent to the determination of the "relevant market", as Mexico suggests, that most WTO Members have not undertaken market access commitments specifically in "termination services"; facilities for the termination and interconnection are essential to the supply of the services at issue in this case.

7.152 Is this market for termination the "relevant" market? For the purposes of this case, we accept the evidence put forward by the United States, and uncontested by Mexico, that the notion of demand substitution � simply put, whether a consumer would consider two products as "substitutable" � is central to the process of market definition as it is used by competition authorities. Applying that principle, we find no evidence that a domestic telecommunications service is substitutable for an international one, and that an outgoing call is considered substitutable for an incoming one. One is not a practical alternative to the other. Even if the price difference between domestic and international interconnection would change, such a price change would not make these different services substitutable in the eyes of a consumer. We accept, therefore, that the "relevant market for telecommunications services" for the services at issue � voice, switched data and fax � is the termination of these services in Mexico.

(ii) Does Telmex have "the ability to materially affect the terms of participation (having regard to price and supply)" in that market?

7.153 The United States maintains that, within the market for termination, Telmex "can materially affect the terms of participation (having regard to price and supply)". It argues that this notion corresponds to the concepts of "market power", used by United States competition authorities, and "substantial power", used by Mexican competition authorities. A firm has market power if it has the ability profitably to maintain prices above competitive levels for a significant period of time, which implies both the ability to maintain prices well above costs, and protection (either governmental limitations or market circumstances) against a rival's entry or expansion. The United States argues that, in determining whether a firm has market power, United States antitrust authorities examine factors such as market share, barriers to entry, capacities of firms in the market, availability of substitutes, and opportunities for coordinated behaviour among firms.⁹²⁷

7.154 Within the market for termination in Mexico, the ILD Rules accord Telmex special powers. ILD Rule 13 provides:

"The long-distance service licensee having the greatest percentage of outgoing long-distance market share for the six months prior to negotiations with a given country shall be the licensee that is authorized to negotiate settlement rates with the operators of said country. These rates shall be submitted to the Commission for its approval."

7.155 Rule 13 effectively grants to the long-distance licensee with the highest volume of outgoing traffic on a particular international market the sole right to negotiate settlement rates which, under Rule 10, all other operators must apply. Since Telmex has always had the largest share of outgoing traffic in every international market, including to the United States, it is, and has consistently been under the Rules, the "licensee authorized to negotiate settlement rates". In these circumstances, since Telmex is legally required to negotiate settlement rates for the entire market for termination of the services at issue from the United States, we find that it has patently met the definitional requirement in Mexico's Reference Paper that it have "the ability to materially affect the terms of participation", particularly "having regard to price".

(iii) If Telmex has the ability to materially affect the terms of participation in that market, does it result from "control over essential facilities", or "use of its position in the market " ?

7.156 The United States argues that Telmex has market power with respect to the termination of the services at issue mainly because of its right under the International Long Distance Rules ("ILD Rules") to determine the single price applicable to all suppliers in the market. It contends that Mexico's own competition authority, the CFC, found in 2001 that Telmex had substantial power in international services markets based on: a market share of 74% in international traffic, control of nearly 75% of international gateway capacity, a right to set prices because of its large market share, as well as advantages arising from vertical integration. Mexico for its part argues that the United States relies on a market determination by the Mexican competition authority that is under review by Mexican courts precisely because it was based on data from 1996, that is, when the telecommunications market was not yet fully open.⁹²⁸ The United States argues that the substantial power of Telmex in the international market would apply automatically to the market for termination, since the ILD Rules guarantee that Telmex, as an originator of international services, is entitled to terminate services in the same proportion. The United States notes that the FCC has also made a finding that Telmex is dominant in the provision of international telecommunications services between the United States and Mexico.⁹²⁹

7.157 The United States also argues that Telmex continues to have market power with respect to the cross-border termination of the services at issue. It contends that Telmex has over 60% of the Mexican international switched market, and has never been below that level; that the United States market is over 80% of that market; that it is not necessary to analyse separately incoming and outgoing minutes, since the proportionate return system links the two; that there have been no significant new entrants since competition was opened in the Mexican international telecommunications market; and that Telmex has demonstrated the ability over a sustained period to maintain prices well above costs.⁹³⁰

7.158 In examining this issue, we have already shown that Telmex possesses the "ability to materially affect the terms of participation" in the relevant market, primarily through its ability to impose its negotiated settlement rate for an international route on its competitors. The ability to impose uniform settlement rates on its competitors is the "use" by Telmex of its special "position in the market", which is granted to it under the ILD Rules.

7.159 Overall, we find therefore that Telmex is a "major supplier", with respect to termination of the services at issue, in that it has the ability to materially affect the price of termination of calls from the United States into Mexico, as a result of its special position in the market, which allows it to set a uniform price applying to all its competitors on terminating calls from the United States.

(b) Are the Telmex interconnection rates "cost-oriented"?

7.160 The United States claims that the interconnection rates negotiated by Telmex are not cost-oriented. The United States argues that the ordinary meaning of "cost-oriented" suggests that the cost at issue must be "related to the cost incurred in providing the good or service".⁹³¹ This meaning is amplified, according to the United States, by the use of this term in many WTO Members' telecommunications laws and regulations, a usage which amounts to a "special meaning" in the sense of Article 31 of the Vienna Convention. The term "cost-oriented" in the context of Mexico's Reference Paper should therefore be interpreted as "the cost incurred in providing interconnection".⁹³² The United States contends that this meaning is confirmed through the practice of WTO Members, including the United States, the European Communities and Mexico.⁹³³ Mexican law, in particular, requires the use of "long run average incremental cost" ("LRAIC") principles, which are consistent with interconnection rates that relate to the cost of providing that service.⁹³⁴ Furthermore, according to the United States, this meaning is consistent with the pro-competitive object and purpose of the Reference Paper commitments, since requiring a major supplier to set interconnection rates based on the cost of providing the interconnection is an important way of ensuring that competitors are on an equal footing.⁹³⁵

7.161 The United States argues that, to the extent that the term "having regard to economic feasibility" qualifies the term "cost-oriented" rates, it simply confirms that interconnection rates should cover "both direct costs and common costs, and should permit a reasonable return on the investor's investment".⁹³⁶ According to the United States, the LRAIC method used by Mexico to develop its domestic interconnection rates includes the cost of capital to finance interconnection facilities, which already includes a reasonable rate of return. The United States agrees with the EC that the language in the EC Interconnection Directive served as a model for the phrase "having regard to economic feasibility", and it is intended there simply to ensure the return on an operator's investment is "reasonable".⁹³⁷

7.162 The United States also argues that the phrase "having regard to economic feasibility" does not temper the obligation to provide interconnection at cost-oriented rates, in light of an overall policy goal such as expanding a country's telecommunications infrastructure. Section 2.2(b) requires a relationship between interconnection rates and the cost of interconnection, not the cost of national infrastructure roll-out.⁹³⁸ According to the United States, its interpretation is contextually supported by Section 2.2(b), which provides that a purchaser of unbundled interconnection "need not pay for network components or facilities that it does not require for the [interconnection] service to be provided", and by Section 3, which provides separate and particular requirements for Members wishing to impose universal service obligations.⁹³⁹

7.163 The United States presents detailed evidence aimed at showing that the current interconnection rates for terminating United States calls charged by Telmex and approved by Mexican authorities (5.5 cents, 8.5 cents, or 11.75 cents per minute, depending on the geographical area in Mexico where the call is terminated) are much higher on average than the prices Telmex charged for purely domestic use of the same network components. The United States also uses three other proxy methods, showing that the interconnection rates that Telmex charges United States cross-border suppliers greatly exceeds grey market retail rates for calls into Mexico, wholesale rates for the termination of calls into other countries, and rates Mexican operators charge each other for settling accounts relating to international calls.

7.164 Mexico argues that the United States incorrectly defines "cost-oriented" rates as requiring that the rate equal the "bare cost" of providing the service. Instead, according to Mexico, the term "tarifas basadas en costos" ("cost-oriented rates") must be interpreted taking into account the qualifying phrase "que sean transparentes, razonables, econ�micamente factibles" ("that are transparent, reasonable, economically feasible") which also appears in Section 2.2(b) of its Reference Paper. In assessing whether cost-oriented rates were "reasonable", Mexico states that relevant factors include the state of a WTO Member's telecommunications industry; the coverage and quality of its telecommunications network; the return on investment; and whether the rates derive from an accounting rate regime. In assessing whether the cost-oriented rates were "economically feasible", Mexico states that rates meet this standard if they are "consistent with the efficient use of income and wealth that is suitable, reflecting the needs of the operator and the policy goals of the country".⁹⁴⁰ In this respect, account had to be taken of Mexico's policy goal of promoting universal access to telecommunications services, which depended to a large extent on accounting rate revenues.

7.165 In resolving the issue of whether Mexico has ensured that Telmex charges "cost-oriented rates" to United States suppliers of the services at issue, we first examine the meaning of this term. In the light of this, we then determine whether the United States has provided evidence that Mexico has failed to ensure that Telmex has met this standard.

(i) Meaning of "cost-oriented" rates

7.166 Section 2.2(b) of Mexico's Reference Paper requires that Mexico ensure interconnection "at cost-oriented rates that are ... reasonable, having regard to economic feasibility".⁹⁴¹ We will first look at the ordinary meaning of the wording.

7.167 With respect to the term "cost-oriented", we note that Japan, a third party to these proceedings, drew the Panel's attention to a discrepancy between the original Spanish term "basadas en costos" and its translation into English "cost-oriented". It was said that the correct translation of "basadas en costos" should have been "based on costs" and that there was a difference in the meaning between those two terms. Although the Panel agreed with this second translation as being the closer to the original Spanish, both parties indicated to the Panel that they did not see any substantive difference in meaning between "basadas en costos" and "cost-oriented". Therefore, in the absence of disagreement between the parties on this point, the Panel considers that "basadas en costos" and "cost-oriented" are interchangeable.

7.168 In examining the ordinary meaning of "cost-oriented", we note that the dictionary meaning of "to orient" is "to adjust, correct, or bring into defined relations, to known facts or principles".⁹⁴² Rates that are "cost-oriented" thus suggest rates that are brought into a defined relation to known costs or cost principles. Rates that are "cost-oriented" would not need to equate exactly to cost, but should be founded on cost. The degree of flexibility inherent in the term "cost-oriented" suggests, moreover, that more than one costing methodology could be used to calculate "cost-oriented" rates.

7.169 As we did in the case of the term "interconnection", we will now examine whether the term "cost-oriented" has a "special meaning", in the sense of Article 31:4 of the Vienna Convention since it is a technical term that may have such a meaning in the telecommunications sector. As already noted, this provision requires that "a special meaning shall be given to a term if it is established that the parties so intended". We consider that Article 31.4 includes cases in which the term at issue is a technical one that is in common use in its field, and which the parties can be presumed to have been aware of. We find this to be the case with "cost-oriented rates".

7.170 The term "cost-oriented rates" is of central importance in national and international telecommunications regulation. Within the ITU, the notion of "cost-oriented rates" is a key concept which has been in common use since 1991. It figures in a key ITU-T series Recommendation D.140, which lays down guidelines for establishing accounting rates for international telephone services.⁹⁴³ Recommendation D.140 states that accounting rates "should be 'cost-orientated' and should take into account relevant cost trends", and that cost-orientation should apply "to all relations on a non-discriminatory basis".⁹⁴⁴

7.171 Recommendation D.140 also enumerates the cost elements to be taken into account when determining accounting rates. Annexed guidelines enumerate these "cost elements": network elements (international transmission facilities, international switching facilities, and the national extension), related costs (direct, and indirect or common costs � including a "reasonable return on equity"), and "other related costs" to be agreed between the parties.⁹⁴⁵ The guidelines specify that several of the related direct costs are relevant only "if applicable", or "directly attributable" to the particular international telephone service. Likewise, related indirect or common costs "cannot be solely attributed to the international telephone service and thus must be allocated". The guidelines suggest therefore that the relevant cost elements are only those that relate to the actual cost of providing the service.

7.172 The principle of "cost-orientation" is confirmed in a related ITU Recommendation, D.150, which was amended in 1999 to describe possible procedures for the "remuneration of the Administration of the country of destination" for international telecommunications traffic. These procedures are: flat rate price, traffic-unit price, accounting revenue division, settlement rate, termination charge, and "other" procedures. For each of these procedures, the Recommendation states that administrations "should apply the principles of � cost-orientation".⁹⁴⁶

7.173 Recommendation D.140 also specifies that cost elements need be valued according to a cost model in order to arrive at specific cost figures. A set of principles adopted in 1999 and annexed to the Recommendation D.140 requires that administrations, in developing and using a cost model, adhere to a "principle of causality" between the service and the resources used to provide it:

"Principle of causality
The demonstration of a clear cause and effect relationship between service delivery on the one hand and the network elements and other resources used to provide it on the other hand, taking into account the relevant underlying cost determinants."⁹⁴⁷

7.174 In sum, Recommendation D.140 requires in its present form that the cost elements and the cost model both be clearly related to the cost of delivering the service. This special meaning of "cost-orientated", in the context of the ITU, is thus consistent with the ordinary meaning of the term as it appears in Section 2.2(b) of Mexico's Reference Paper. As both parties to this dispute as well as most WTO Members are also members of the ITU, the special definition adds precision to the ordinary meaning by classifying allowable cost elements, and establishing the causality between the cost elements and the services provided. While leaving a margin of discretion to national authorities to choose the precise cost method by which to arrive at "cost-oriented" rates, the ITU recommendations indicate that the term "cost-oriented rates" can be understood as rates related to the cost incurred in providing the service.

7.175 In examining further the "special meaning" of the term "cost-oriented", we note that the ITU states in a report that "incremental cost methodologies are becoming the de facto standard for interconnection pricing around the world".⁹⁴⁸ These methods focus on the additional future fixed and variable costs that are attributable to the service. Setting rates in line with long run incremental costs reflects the view that the regulator should require prices from dominant or major suppliers that most closely imitate a fully competitive market, where prices are driven down towards marginal or incremental costs.⁹⁴⁹ The increasing use of incremental cost methodologies indicates the special meaning that the term "cost-oriented" is acquiring among WTO Members.

7.176 Mexico is among the WTO Members that implements a type of long run incremental cost methodology, known as LRAIC. Article 63 of Mexico's Federal Law on Telecommunications gives the authority to impose on any public telecommunications licensee with substantial market power rates that aim at "recovery, at least, of the long run average incremental cost".⁹⁵⁰ This measure is aimed at avoiding predatory pricing.

7.177 We find therefore that the increasing and wide-spread usage of incremental cost methodologies among WTO Members supports the interpretation of the term "cost-oriented" as meaning the costs incurred in supplying the service, and that the use of long term incremental cost methodologies, such as those required in Mexican law, is consistent with this meaning.

7.178 So far, we have examined the meaning of "cost-oriented rates" without taking into account the subsequent phrase in Section 2.2(b) of Mexico's Reference Paper: "that are transparent, reasonable, having regard to economic feasibility". We now examine what interpretative effect should be given this phrase. We recall that Section 2.2(b) requires a Member to ensure that interconnection is provided by a major supplier:

"in a timely fashion, on terms, conditions (including technical standards and specifications) and cost-oriented rates that are transparent, reasonable, having regard to economic feasibility, and sufficiently unbundled so that the supplier need not pay for network components or facilities that it does not require for the service to be provided � "⁹⁵¹ (emphasis added)

7.179 We first examine the relationship of the phrases "reasonable" and "having regard to economic feasibility" with the other elements of the Section 2.2(b). We note that the provision isolates certain key elements in the relationship of interconnection between a supplier and a major supplier � "terms", "conditions" and "rates". It then lists some general qualifiers � including "reasonable", and "having regard to economic feasibility".

7.180 The phrase "terms and conditions" is commonly used to designate the elements of a contract or an agreement. The word "terms", in its specialized legal sense, can mean "conditions, obligations, rights, price, etc., as specified in contract or instrument"⁹⁵²; while "condition" may be defined as "a provision in a will, contract, etc., on which the force or effect of the document depends."⁹⁵³ Therefore "rates" can be seen as special types of "terms" or "conditions", and that whatever qualifies "terms" or "conditions" also qualifies "rates". Further, it is clear that "reasonable" must qualify "terms" and "conditions", since these two expressions are not otherwise qualified. Based on these two observations, we conclude that the term "reasonable" must also, at a minimum, impart some meaning to "cost-oriented rates".

7.181 The phrase "having regard to economic feasibility" could act as a general qualifier in the same way as "reasonable" or, because it begins with the connecting participle "having ...", it could be interpreted as being attached to and qualifying only the word "reasonable" which precedes it. Either way � directly or through qualifying the term "reasonable" � the phrase imparts meaning to "cost-oriented rates". We note, however, that because the word "rates" is qualified directly and specifically by the expression "cost-oriented", that this expression should have a preponderant weighting.

7.182 We now consider what additional meaning the terms "reasonable" and "having regard to economic feasibility" impart to "cost-oriented rates". We start with the term "reasonable". The ordinary meaning of the word "reasonable" suggests something that is "not irrational, absurd or ridiculous".⁹⁵⁴ Defined positively, reasonable can be defined as something "of such an amount, size, number, etc., as is judged to be appropriate or suitable to the circumstances or purpose".⁹⁵⁵ The term "reasonable" thus suggests that the interconnection rates should be "suitable to the circumstances or purpose" � in other words, that they reflect the overall objectives of the provision that the rates represent the costs incurred in providing the service. The word "reasonable" thus emphasizes that the application of the cost model chosen by the Member reflects the costs incurred for the interconnection service. Flexibility and balance are also part of the notion of "reasonable".⁹⁵⁶

7.183 The qualification of "cost-oriented rates" by the word "reasonable" would not therefore permit costs to be included in the rate that were not incurred in the supply of the interconnection service. Thus, contrary to Mexico's position, the general state of the telecommunications industry, the coverage and quality of the network, and whether rates are established under an accounting rate regime, are not relevant to determining a proper cost-oriented rate.

7.184 We now examine the qualifier "having regard to economic feasibility". We have established that the phrase imparts meaning to "cost-oriented" either directly, or indirectly through the term "reasonable". Normally, however, a "cost-oriented" rate must meet an "economic feasibility" standard, since the cost-oriented rate by definition covers all incurred costs, including a reasonable rate of return. The application of the "economic feasibility" standard would thus appear to have more meaning when applied to "terms" and "conditions". Its use here to qualify "cost-oriented rates" serves merely to underline that the major supplier is entitled to rates that allow it to undertake interconnection on an "economic" basis, that is, to make a reasonable rate of return.

7.185 This interpretation is supported to some extent by negotiating history. The phrase "having regard to economic feasibility" was, according to the United States, adapted from language being developed for the EC Interconnection Directive. The European Communities claims that this phrase is understood to mean that the operators must be allowed a "reasonable rate of return on investment."⁹⁵⁷

(ii) Does Telmex interconnect United States suppliers at cost-oriented rates?

7.186 We now examine whether the United States has presented evidence demonstrating that Mexico has not ensured that Telmex has interconnected United States suppliers of the services at issue at cost-oriented rates, as required by Section 2.2 of Mexico's Reference Paper.

7.187 The United States uses four methods to show that Telmex does not charge cost-oriented rates to United States suppliers of the services at issue. First, it presents evidence that the same network elements used to interconnect United States suppliers, when used for domestic interconnection, cost on average 75% less. Second, it presents evidence that grey market rates for a variety of international routes to Mexico are far lower than the rates charged by Telmex. Third, it presents evidence that wholesale rates to terminate calls between various countries with competitive long-distance operators is much lower than the rates charged by Telmex. Fourth, the United States presents evidence that the financial arrangements related to "proportionate return" procedures among Mexican operators pursuant to the ILD Rules show that Telmex's rates are above cost. We examine in turn each of these methods.

7.188 We note that Mexico did not offer comments on the specific methods of evaluating costs and settlement charges presented by the United States, nor did it take up the Panel's invitation to submit its own calculations.⁹⁵⁸

aa) Comparison with domestic prices in Mexico for the same network components

7.189 We start with an examination of the first method offered by the United States to demonstrate that the rate charged by Telmex to United States suppliers of the services at issue are not cost-oriented. The United States argues that, in the absence of Telmex data on costs, the maximum cost to Telmex of interconnecting a United States supplier can be estimated by identifying the network components used by Telmex to terminate calls from the United States, and then adding together the published prices of these components established by Cofetel or Telmex. Since the published component prices are set to cover Telmex's costs, the sum total of the component prices is a "cost-ceiling" for the aggregate network components.

7.190 Mexico argues that the type of cost analysis proposed by the United States is not in the GATS. There is not, for Mexico, a common understanding of the meaning of the term "cost-oriented".⁹⁵⁹ Furthermore, the United States analysis could not apply to settlement rates for international calls; it could only be used for interconnection under a "full-circuit", and usually a domestic regime.⁹⁶⁰

7.191 We find that the United States' basic methodology provides a useful indication of the costs incurred by Telmex in interconnecting United States suppliers and terminating their calls in Mexico. We think it is justified to presume that the aggregate price charged by Telmex for the use of network components, when used for purely domestic traffic, is an indication of the cost-oriented rate, in the sense of Section 2.2(b) of Mexico's Reference Paper, for the use of these same network components in terminating an international call. We cannot accept Mexico's arguments to the contrary, which it bases on an overly flexible meaning of "cost-oriented", and the fact that an "accounting rate regime" applies to the services at issue. We have already made findings that reject these arguments.

7.192 In examining the application of the United States methodology, we are not convinced that the implicit traffic distribution used to weigh costs and settlement charges of the three groups of Mexican localities, which would indicate that the bulk of incoming international calls go to small localities, is representative of what could be expected, and we believe might understate the difference between average settlement and costs. Nonetheless, the cost figures put forward by the United States, and uncontested by Mexico, are such that the conclusions of our analysis remain substantively unchanged, even assuming that a greater proportion of traffic goes to the larger cities.

7.193 We now examine the main elements of the United States analysis, the individual factual elements of which are not contested by Mexico despite specific requests from the Panel.⁹⁶¹ The United States presents evidence successively on: the identification of relevant network components; Telmex prices for these components; the calculation of the aggregate component prices for each of three types of destination in Mexico; and the calculation of the differences between the aggregate prices and Telmex rates. We examine each of these elements in turn.

i) Relevant network components

7.194 The United States identifies four Telmex network components that are used to interconnect United States cross-border suppliers:

(a) international transmission and switching
(b) local links
(c) subscriber line, and
(d) long-distance links.

7.195 These components are consistent with the categories recommended by the ITU, which is considered good international practice. The network components used for international telephone services are categorized as follows: international transmission and switching facilities (component (a) above), and the national extension (components (b) to (d) above).⁹⁶² The ITU also specifically includes "direct" and "indirect" costs.

7.196 The evidence presented by the United States identifying the relevant Telmex network components is uncontested by Mexico. We find, on the basis of the evidence before us, that the relevant network elements are international transmission and switching, local links, subscriber line, and long-distance links.

ii) Prices for the relevant network components

7.197 The United States presents evidence that either Telmex or Cofetel has established rates for each of the relevant network elements. The rates established by Cofetel are published, and relate to international transmission and switching, and terminating interconnection to cities where there is long-distance competition. The rates established by Telmex are also published, and relate to local and long-distance links. Both Cofetel and Telmex are legally required to set prices that recover at least the total cost of these network components.⁹⁶³

7.198 The United States classifies all calls to Mexico into three price categories, according to the use they make of Telmex's network. These three zones are: (1) calls terminating in Mexico City, Guadalajara, and Monterrey; (2) calls terminating in approximately 200 medium size cities; and (3) calls terminating in other locations in Mexico. We now examine the pricing evidence which the United States presents for each of these three zones.

� Termination in Zone 1 (large cities)

7.199 The United States presents evidence that in these cities (Mexico City, Guadalajara, and Monterrey) United States suppliers need only use three network components. These components are charged at the following rates: international transmission and switching (1.5 cents/minute); local link (0.022 cents/minute) and subscriber line (1.003 cents/minute). Together these charges amount to 2.525 cents/minute. However, Telmex currently charges 5.5 cents per minute, or 120% more than the maximum cost it incurs to terminate these calls into zone 1.

� Termination in Zone 2 (medium cities)

7.200 The United States presents evidence that in these medium-sized cities, which do not have an international gateway switch, an additional network component � a "long-distance link" � is needed. The components are charged at the following rates: international transmission and switching (1.5 cents/minute); local link (0.022 cents/minute); long-distance link (0.536 cents/minute); and subscriber line (1.003 cents/minute). Together these charges amount to 3.061 cents/minute. However, Telmex currently charges 8.5 cents per minute, or 175% more than the maximum cost it incurs to terminate these calls into zone 2.

� Termination in Zone 3 (other cities)

7.201 Finally, the United States presents evidence for certain cities that Telmex has not opened to originating competition. Telmex uses the same network components for termination of calls to these cities as it does to zone 2 cities. However, for these cities, no unbundled pricing information is available for the long-distance link and subscriber line. The United States therefore uses a proxy cost (7.76 cents/minute) based on the "reventa" rate that Telmex charges its competitors to terminate calls to these cities. The components are charged at the following rates: international transmission and switching (1.5 cents/minute); local link (0.022 cents/minute); terminating interconnection (7.76 cents/minute). Together these charges amount to 9.28 cents/minute. However, Telmex currently charges 11.75 cents per minute, or 27% more than the maximum cost it incurs to terminate these calls into zone 3.

iii) Difference between component prices and Telmex rates

7.202 Based on the aggregate component prices for the termination of calls into each to the three zones, the United States presents evidence of a difference between the aggregated component prices and the rates charged to United States suppliers for each of the three individual zones. Overall, and based on figures for traffic during the months of March to May 2002, the Telmex blended cost ceiling is 5.2 cents/minute, and the Telmex blended rate is 9.2 cents/minute, which is 77% more than the cost ceiling.

7.203 We earlier accepted in principle the United States method for determining the difference between interconnection rates charged by Telmex to the United States suppliers of the services at issue, and the aggregate costs for relevant network components. We found earlier that it is a justified presumption that any substantial difference between the two figures was evidence that the Telmex interconnection rates were not "cost-oriented" in the sense of Article 2.2(b) of Mexico's Reference Paper. The evidence reveals that the blended average difference in costs is in the order of 77%. Mindful of the fact that the cost-ceiling figures used are conservative (since they are based in part on retail rates for private lines, and Telmex's interconnection rates to cities without competition in call origination), we find that a difference of over 75% above Telmex's demonstrated cost-ceiling is unlikely to be within the scope of regulatory flexibility allowed by the notion of "cost-oriented" rates, in the sense of Section 2.2(b) of Mexico's Reference Paper.

bb) Comparison with "grey market" prices on the Mexico-United States route

7.204 We now examine the second method used by the United States to demonstrate that the rates charged by Telmex to United States suppliers of the services at issue are not "cost-oriented". The method is based on the use of data on exchange traded capacity (which the United States labels grey market). These grey market arrangements, which are based on the lease of cross-border links, bypass the uniform settlement rates required under Mexican regulations, and are technically illegal in Mexico. The United States presents evidence, derived from a major traffic exchange company, that grey market rates for transport and termination of international traffic into Mexico, sold in London, Los Angeles and New York also show that Telmex interconnection rates are not cost-oriented.

7.205 Mexico objects that this method is not legitimate, since it is based on methods of supply of the service (such as international simple resale) that are not permitted under Mexican law. We do not accept Mexico's argument, since what is relevant here is solely the determination of actual costs incurred in terminating an international service within Mexico, and not the legitimacy of such practices. Even though Mexico does possess all the relevant information concerning cost elements, it does not show that grey-market or bypass services do not cover the costs of the various components at issue, nor that any costs are not recovered in such rates. We find therefore that recourse to this subsidiary method by the United States is in principle justifiable for the purpose of estimating the costs of Telmex in interconnecting United States suppliers and terminating their calls.

7.206 The United States presents evidence that rates offered by grey market operators from Los Angeles, New York and London to cities in Mexico range from 1.3 cents/minute to 9.6 cents/minute, depending on the city of destination, compared to 5.5 cents/minute to 11.75 cents/minute for Telmex. Telmex rates therefore ranged from 22% to 323% above grey market rates, depending on the city of destination in Mexico. According to the United States, the grey market rates likely overstated the real costs of the relevant network components within Mexico, since the grey market rates also included the cost of transmission of the signal to the Mexican border, the regulatory risk due to the illegal nature of the activity in Mexico, and the higher cost of low-efficiency links frequently used by such operators.

7.207 As Mexico has not submitted evidence to the contrary, we find that this methodology points to Telmex interconnection rates in the range of 22% to 323% above grey market rates for international calls into Mexico. We are not convinced however that the use of data on exchange traded capacity is fully warranted, as such capacity may be priced at short-term incremental cost (well below long-term incremental cost as required under Mexican law for calculating interconnection charges) and may also result in lower service reliability and quality. For this reason, and since these figures are based on the prices of only one major traffic exchange company⁹⁶⁴ on 13 September 2002, we would not make an independent finding, based solely on these figures, that Telmex rates are not cost-based in the meaning of Section 2.2(b) of Mexico's Reference Paper. We find nonetheless that the substantial difference in costs goes some way to support the finding under the first method described above.

cc) Comparison with termination rates on other international routes

7.208 We now examine the third method used by the United States to demonstrate that the rates charged by Telmex to United States suppliers of the services at issue are not "cost-oriented". The method is based on a comparison of the market for wholesale transportation and termination of international calls. We accept that this method is a valid method for estimating costs of network components used for interconnection

7.209 The United States presents evidence, based on wholesale rates on a major exchange⁹⁶⁵ to terminate calls to countries, like Mexico, that have more than one long-distance provider. The rates range from 1.2 cents/minute to 6.23 cents/minute, compared to Telmex blended average interconnection rate of 9.2 cents/minute. Telmex interconnection rates are therefore 48% to 667% above these wholesale rates.

7.210 We find that this method results in Telmex interconnection rates of between 48% to 667% above wholesale rates into other international markets with more than one long distance provider. We find that the results of this method lend credibility to the result under the first method. However, since this evidence is based only on the data of one major operator on one particular day, and does not concern traffic into Mexico, we would not base a finding solely on this evidence.⁹⁶⁶

dd) "Proportionate return" procedures among Mexican operators

7.211 We now examine the fourth and final method offered by the United States to demonstrate that the rates charged by Telmex to United States suppliers of the services at issue are not cost-oriented. The method is based on the "proportionate return system" required under the ILD Rules.⁹⁶⁷ Under this system, operators of international gateways in Mexico allocate incoming calls among themselves in proportion to each operator's share of outgoing calls. Since the operators do not always receive traffic at their gateways in the proportion of their outgoing calls, Rule 16 provides for a transfer of these calls to another gateway operator, who may deduct a fee for its gateway services. The remainder of the settlement rate from the foreign operator goes to the operator to whom the call is transferred. Rule 17 allows "financial compensation agreements" to be negotiated between gateway operators, instead of the physical transfer of calls.

7.212 The United States points out that, under Rule 17 financial compensation agreements:

"operators terminate excess traffic with their own network arrangements, deduct the 'cost' incurred in such termination from the settlement payments received for that traffic, and distribute the residual amount to the operator entitled to additional traffic under the ILD Rules. Implementing this financial transfer, however, requires operators to agree on the cost of terminating a call � since what they transfer between themselves is only the 'premium' on such calls, or the amount in excess of the costs incurred for terminating such calls."⁹⁶⁸

7.213 We observe that the Rule 17 arrangements, which on the uncontested evidence of the United States, involve "most" of the market allocation adjustments, can only exist if there is a "surplus" to distribute after the full costs of interconnection have been deducted by the operator receiving the call. This surplus can only exist if the Telmex settlement rate does not reflect the operator's costs, and there is consequently something left to distribute. We find therefore that the existence and use of the "financial compensation agreements", which implement the "proportionate allocation" rules, are further evidence of the fact that Telmex interconnection rates are not cost-oriented in the sense of Section 2.2(b) of Mexico's Reference Paper.

7.214 More generally, Mexico argues that commitments made by developing country Members have to be interpreted in the light of paragraph 5 of the preamble to the GATS, and GATS Article IV which recognize that these Members need to "strengthen their domestic services capacity and efficiency and competitiveness".⁹⁶⁹ However, we note that these provisions describe the types of commitments that Members should make with respect to developing country Members; they do not provide an interpretation of commitments already made by those developing country Members.

7.215 The following table summarizes the various cost estimates presented by the United States:

Table 1

Mexico - summary of comparisons between interconnection costs and settlement rates

Method	Cost (US cents/min)	Settlement rate (in Mexico US cents/min)	Multiple (Settlement as multiple of cost)
1. Cost of components in Mexico
3 largest cities	2.5	5.5	2.2
200 medium-size cities	3.0	8.5	2.8
Other localities	9.3	11.8	1.3
Weighted average⁹⁷⁰	5.2	9.2	1.8
2. Exchange traded capacity⁹⁷¹
3 largest cities	1.5
200 medium-size cities	6.1
Other localities	9.3
3. International comparators⁹⁷²	2.5

7.216 The Panel decided, after having received no evidence from Mexico in response to our questions relating to the United States cost estimates (see paragraph 7.188 and footnote 958 above), to base itself on the methodologies presented to the Panel by the United States and not refuted by Mexico. On this basis, we conclude overall that the interconnection rates charged by Telmex to United States suppliers of the services at issue are not "cost-oriented" within the meaning of Section 2.2(b) of Mexico's Reference Paper, since by any of the methodologies presented to the Panel by the United States, they are substantially higher than the costs which are actually incurred in providing the interconnection. Therefore, we find that Mexico has failed to fulfil its commitments under Section 2.2(b) of the Reference Paper by failing to ensure that a major supplier in terms of Section 2.2 of the Reference Paper provides interconnection to United States basic telecom suppliers of the services at issue on a facilities basis under cost-oriented rates.

(iii) Are the Telmex interconnection terms and conditions "reasonable"?

7.217 The United States argues that Section 2.2 of Mexico's Reference Paper also requires that the "terms and conditions" of interconnection must be "reasonable". An interpretation of that word in its context, and in the light of the object and purpose of the GATS suggests, according to the United States, that terms and conditions on interconnection are not "reasonable" if they "restrict the supply of the service". The United States points to the de jure monopoly power granted by Mexican law to Telmex under the ILD Rule 13 to set the interconnection rate, and impose that rate on all other Mexican long-distance operators; it also points to the rejection by Mexican authorities of requests by both Mexican and United States suppliers to negotiate lower interconnection rates. For the United States, these measures result in "unreasonable" terms and conditions for interconnection with Telmex, since they restrict the supply of scheduled services through raising prices, reducing demand and lessening competition.

7.218 The United States argues that the term "having regard to economic feasibility" qualifies the requirement for "reasonable" terms and conditions.⁹⁷³ In this sense, it limits the obligation to provide interconnection on reasonable terms and conditions in cases including where revenues from interconnecting operators would not cover costs due to insufficient demand or because of increased costs of rapid installation of facilities.

7.219 Mexico replies that the United States has not shown that either the ILD Rules regarding settlement rates, or the Mexican refusal to permit alternative rates, are "terms and conditions" of interconnection with a "major supplier" that are not "reasonable". The United States had not shown, according to Mexico, that factors concerning rates of interconnection are "terms and conditions" of interconnection and, even it they were, that these rates were terms and conditions of interconnection with a "major supplier", as required by Section 2.2(b) of Mexico's Reference Paper. Even if Telmex were considered a "major supplier", the requirements in the ILD Rules that the United States objects to could hardly be said to be "unreasonable": the need to interconnect through an international port; the need to interconnect through an interconnection agreement; and the right of Telmex to negotiate its own settlement rates. The fact that other Mexican operators have to apply the rate negotiated by Telmex is not, according to Mexico, a term and condition of interconnection with a "major supplier", since no one suggests that the other Mexican suppliers have that status.⁹⁷⁴ Nor does the refusal of Mexican authorities to permit alternative rates constitute "terms and conditions" of interconnection with a "major supplier".

7.220 Mexico argues that the United States' interpretation of "reasonable" has no merit. All forms of government regulation relate to the terms and conditions of supply of a service and have some impact on the level of supply of that service. It could hardly be said, however, that merely because a government regulation has that effect, that it is not "reasonable". In any case, according to Mexico, it is not the "terms and conditions" of interconnection that restrict the supply of basic telecommunications, but the valid limitations on cross-border supply that Mexico has inscribed in its schedule. Even if the United States definition of "reasonable" were accepted, argues Mexico, Mexico's ILD Rules do not violate that standard, in that they do not restrict in any way the supply of a scheduled service.

7.221 We do not consider it necessary for our findings on Mexico's commitments under Section 2.2(b) of the Reference Paper to also decide on the additional claims by the United States that Mexico has failed to ensure that the terms and conditions of interconnection with Telmex are reasonable as required by Section 2.2(b) of the Reference Paper. Having found that the phrase "terms and conditions" may cover also interconnection rates, we are inclined to find that the approval by the Mexican authorities of the above cost rate (including reasonable profits) � and the imposition of that above cost rate as a uniform interconnection rate in a manner excluding price competition in the relevant Mexican market � may also constitute, as claimed by the United States, "failure" by Mexico to "ensure" that interconnection with a major supplier is provided on reasonable terms and conditions.⁹⁷⁵ We note, however, that the interpretation of "reasonable terms and conditions" of interconnection with a major supplier in Section 2.2(b) of the Reference Paper may also be informed by the interpretation of Mexico's obligations under Section 1 of the Reference Paper regarding "competitive safeguards", which we examine in the following Section C of our report. Moreover, in Section D of our report, we have to examine the claim by the United States that Mexico does not permit interconnection of United States suppliers on "reasonable terms and conditions" contrary to Section 5(a) of the GATS Annex on Telecommunications. Having already found an inconsistency with Mexico's obligations under Section 2.2(b) of the Reference Paper, we consider it wiser and justified to exercise "judicial economy" with regard to the United States claim of an additional inconsistency with the requirement in Section 2.2(b) of "reasonable" terms and conditions.

C. WHETHER MEXICO HAS MET ITS COMMITMENT UNDER SECTION 1 OF ITS REFERENCE PAPER

7.222 The United States argues that Mexico has not met the requirements of Section 1.1 of its Reference Paper, which provides that "[a]ppropriate measures shall be maintained for the purpose of preventing suppliers who, alone or together, are a major supplier from engaging in or continuing anti-competitive practices." In the absence of a precise definition of "anti-competitive practices", the United States argues that the term encompasses, at a minimum, practices usually proscribed under national law: abuse of dominant position, monopolization, and cartelization. The United States argues that, far from proscribing such behaviour, Mexico maintains measures that require Mexican telecommunications operators to adhere to a horizontal price-fixing cartel led by Telmex. This requirement is contained in ILD Rule 13, which obliges the Mexican operator with the most outgoing traffic on a particular international route to negotiate with the suppliers of that country a single settlement rate, which then applies, by virtue of ILD Rule 23, to all other Mexican operators. Anti-competitive practices are also evidenced, according to the United States, by the required "proportionate return" system defined in ILD Rule 2:XIII, by which a Mexican operator is entitled to receive as much incoming traffic as it sends outgoing traffic.

7.223 In response, Mexico argues that its Reference Paper commitments apply only to matters within its border, and not to services supplied under an accounting rate regime. In any case, Mexico contends, it has put in place "appropriate measures" to prevent anti-competitive practices under its general competition laws. As for the ILD Rules they are, according to Mexico, aimed at increasing competition � by stopping new entrants from being undercut on pricing, and by preventing foreign operators from dictating prices to their Mexican affiliates. The United States had not shown that Telmex is a "major supplier" in the relevant market, and behaviour legally required under Mexican law could not be an "anti-competitive practice".

7.224 We examine first the terms of Section 1.1 of Mexico's Reference Paper. It reads:

"Prevention of anti-competitive practices in telecommunications
Appropriate measures shall be maintained for the purpose of preventing suppliers who, alone or together, are a major supplier from engaging in or continuing anti-competitive practices. "⁹⁷⁶

7.225 We note that Section 1.1 contains three key elements: (i) a "major supplier"; (ii) "anti-competitive practices"; and (iii) "appropriate measures" which must be maintained. We examine each of these elements in turn.

1. Is Telmex a "major supplier"?

7.226 Section 1 provides that the anti-competitive practices to be prevented are those of "suppliers who, alone or together, are a major supplier". The United States claims that Telmex has always had the largest share of the United States � Mexico market for the termination of voice telephony, facsimile and circuit-switched data transmission services, and it is thus a "major supplier" in that market. Mexico counters that the market for "termination" services is not relevant to the case, since termination services can only be supplied through commercial presence, and not on a cross-border basis. Even if termination services were potentially relevant, Mexico argues that Telmex does not in fact provide these services.

7.227 In our earlier analysis of the United States claim under Section 2.2 of Mexico's Reference Paper, we found that Telmex is a "major supplier" within the meaning of Mexico's Reference Paper, with respect to the services at issue.⁹⁷⁷ We based this finding on the ability of Telmex to affect the terms of participation through use of its position in the relevant market, which we found to be the termination in Mexico of the services at issue. We see no reason to alter our analysis of the same term, with respect to same services, in examining Mexico's commitments under Section 1 of its Reference Paper. We find therefore that Telmex, for the purposes of Section 1 of its Reference Paper, is a "major supplier."

7.228 We note that Section 1 establishes an obligation with respect to "suppliers who, alone or together, are a major supplier". The practices at issue involve not only Telmex, but all the other Mexican suppliers who are gateway operators. Since we have already found that Telmex alone is a "major supplier" within the meaning of Section 1, and that the practices at issue involve acts of all the Mexican suppliers who are gateway operators, we can conclude also that Telmex and all the other Mexican gateway operators are together a "major supplier".

2. What are "anti-competitive practices"?

7.229 We next examine the meaning of "anti-competitive practices", and whether such practices can result from the requirements of a Member's laws.

(a) Meaning of "anti-competitive practices"

7.230 The term "anti-competitive practices" is not defined in Section 1 of Mexico's Reference Paper. The dictionary meaning of the word "practices" is very general. Its meanings include "the habitual doing or carrying on of something; usual, customary, or constant action; action as distinguished from profession, theory, knowledge, etc.; conduct."⁹⁷⁸ The word "practices" thus indicates "actions" in general, or can mean actions that are "usual" or "customary". The dictionary meaning of the word "competitive" includes "characterized by competition; organized on the basis of competition".⁹⁷⁹ The word "competition", in its relevant economic sense, is in turn defined as "rivalry in the market, striving for custom between those who have the same commodities to dispose of".⁹⁸⁰ Consistent with these meanings, the word "anti-competitive" has been defined as "tending to reduce or discourage competition.⁹⁸¹ On its own, therefore, the term "anti-competitive practices" is broad in scope, suggesting actions that lessen rivalry or competition in the market.

7.231 We now examine the term "anti-competitive practices" in the context of the Reference Paper. Examples of "anti-competitive practices" are set out in paragraph 2 of Section 1, which states that such practices "shall include in particular":

"(a) engaging in anti-competitive cross-subsidization;
(b) using information obtained from competitors with anti-competitive results; and
(c) not making available to other services suppliers on a timely basis technical information about essential facilities and commercially relevant information which are necessary for them to provide services."

7.232 The list is introduced by the phrase "shall include in particular", indicating that this list is not exhaustive and that therefore the above examples do not represent all "anti-competitive practices" within the scope of the provision. The examples do however illustrate certain practices that were considered to be particularly relevant in the telecommunications sector. The first example � on cross-subsidization � indicates that "anti-competitive practices" can include pricing actions by a major supplier. All three examples show that "anti-competitive practices" may also include action by a major supplier without collusion or agreement with other suppliers. Cross-subsidization, misuse of competitor information, and withholding of relevant technical and commercial information are all practices which a major supplier can, and might normally, undertake on its own.

7.233 Further context is provided by the narrowing of the scope of Section 1 of Mexico's Reference Paper to practices of a "major supplier". We recall that the term "major supplier" is defined in Mexico's Reference Paper as:

"a supplier which has the ability to materially affect the terms of participation (having regard to price and supply) in the relevant market for basic telecommunications services as a result of:
(a) control over essential facilities; or
(b) use of its position in the market."

7.234 The use of the term "major supplier" in Section 1, examined in the light of the definition of this term, suggests that the focus of "anti-competitive practices" is on a supplier's "ability to materially affect the terms of participation (having regard to price and supply)" � in other words, on monopolization or the abuse of a dominant position in ways that affect prices or supply. The definition of a major supplier in terms of suppliers "alone or together" and the requirement in Section 1.1 of "preventing suppliers from engaging in or continuing anti-competitive practices" also suggests that horizontal coordination of suppliers may be relevant. This is supported by the requirement in Section 1.1 of "preventing suppliers from engaging in or continuing anti-competitive practices."

7.235 The meaning of "anti-competitive practices" is also informed by the use of this term in Members' own competition legislation.⁹⁸² Many WTO Members maintain laws to ensure that firms do not undermine competition in their markets. The term "anti-competitive practices" is often used in these laws to designate categories of behaviour that are unlawful. The range of anti-competitive practices that are prohibited varies between Members, but practices that are unlawful under the competition laws of Members having such laws include cartels or collusive horizontal agreements between firms, such as agreements to fix prices or share markets, in addition to other practices such as abuse of a dominant position and vertical market restraints.⁹⁸³

7.236 In addition, the meaning of "anti-competitive practices" is informed by related provisions of some international instruments that address competition policy. Article 46 of the 1948 Havana Charter for an International Trade Organization already recognized that restrictive business practices, such as price-fixing and allocation of markets and of customers, could adversely affect international trade by restraining competition and limiting market access. The importance of ensuring that firms refrain from engaging in horizontal price fixing agreements, market or customer allocation arrangements and other forms of collusion is likewise emphasized in the United Nations Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices.⁹⁸⁴ It is also worth pointing out, since both Mexico and the United States are members of the OECD, that the OECD has adopted a Recommendation calling for strict prohibition of cartels.⁹⁸⁵ In the work of the WTO Working Group on the Interaction between Trade and Competition Policy, reference has been made to the pernicious effects of cartels, and to the consensus that exists among competition officials that price-fixing "hard core cartels" ought to be banned.⁹⁸⁶ Cartels were also described as the most unambiguously harmful kind of competition law violation.⁹⁸⁷

7.237 An examination of the object and purpose of the Reference Paper commitments made by Members supports our conclusion that the term "anti-competitive practices", in addition to the examples mentioned in Section 1.2, includes horizontal price-fixing and market-sharing agreements by suppliers which, on a national or international level, are generally discouraged or disallowed. An analysis of the Reference Paper commitments shows that Members recognized that the telecommunications sector, in many cases, was characterized by monopolies or market dominance. Removing market access and national treatment barriers was not deemed sufficient to ensure the effective realization of market access commitments in basic telecommunications services. Accordingly many Members agreed to additional commitments to implement a pro-competitive regulatory framework designed to prevent continued monopoly behaviour, particularly by former monopoly operators, and abuse of dominance by these or any other major suppliers. Members wished to ensure that market access and national treatment commitments would not be undermined by anti-competitive behaviour by monopolies or dominant suppliers, which are particularly prevalent in the telecommunications sector. Mexico's Reference Paper commitment to the prevention of "anti-competitive practices" by major suppliers has to be read in this light.

7.238 Based on this analysis, we find that the term "anti-competitive practices" in Section 1 of Mexico's Reference Paper includes practices in addition to those listed in Section 1.2, in particular horizontal practices related to price-fixing and market-sharing agreements.

(b) Whether practices required under a Member's law can be "anti-competitive practices"

7.239 We now take up the issue of whether acts by a major supplier can be "anti-competitive practices" if they are required by a Member's law, and not freely undertaken by a major supplier.

7.240 The United States argues that anti-competitive practices do not change their nature simply because they are required by national laws and regulations. In the view of the United States, "[j]ust because Mexican regulation requires the suppliers to collude does not mean they are not indeed colluding or, in other words, engaging in horizontal price fixing." It argues further that any other interpretation would render the provision self-defeating and meaningless, since a Member "could easily avoid the obligation to maintain appropriate measures to prevent 'anti-competitive practices' by formally requiring such practices."⁹⁸⁸

7.241 Mexico argues that the ILD Rules are part of the regulatory framework of laws intended to increase competition. Mexico also contends that in any case the focus of Section 1.1 of its Reference Paper is on anti-competitive "practices" by a major supplier that are not required under a Member's law. Otherwise, the language of Section 1.1 would have gone further and specifically prohibited anti-competitive "measures" implemented or maintained by a WTO Member. The European Communities, as third party to these proceedings, believes that under the ILD Rules "the fixing of a uniform price cannot be an anti-competitive practice since uniform prices are required by law. The same goes for the revenue sharing system ("proportional return") since this is also mandated by law."⁹⁸⁹ The European Communities concludes that "[if] Mexico chooses not to allow competition between telecommunications operators on a certain matter, there is no scope for anti-competitive practices relating to that matter. It is not possible to restrict competition where competition is not allowed."⁹⁹⁰

7.242 We have examined the meaning of the term anti-competitive practices in the previous section. We now look at whether anti-competitive practices, as this term is used in Section 1 of the Reference Paper, also covers practices by a major supplier that are required by a Member's law. The first illustrative example in Section 1.2 of anti-competitive practices is anti-competitive cross-subsidization. Cross-subsidization was and is a common practice in monopoly regimes, whereby the monopoly operator is required by a government to cross subsidize, either explicitly or in effect, usually through government determination or approval of rates or rate structures. Once monopoly rights are terminated in particular services sectors, however, such cross-subsidization assumes an anti-competitive character. This provision, therefore, provides an example of a practice, sanctioned by measures of a government, that a WTO Member should no longer allow an operator to "continue". Accordingly, to fulfil its commitments with respect to "competitive safeguards" in Section 1 of the Reference Paper, a Member would be obliged to revise or terminate the measures leading to the cross-subsidization. This example clearly suggests that not all acts required by a Member's law are excluded from the scope of anti-competitive practices.

7.243 Sections 1 and 2 of Mexico's Reference Paper impose obligations on Members with respect to the behaviour of major suppliers. Section 2.1 illustrates that Members did not hesitate to undertake obligations, with respect to a major supplier, that defined an objective outcome � "cost-oriented" interconnection. There is no reason to suppose, and no language to suggest, that the desired outcome in Section 1 � preventing major suppliers from engaging in anti-competitive practices � should depend entirely on whether a Member's own laws made such practices legal.

7.244 The Panel is aware that, pursuant to doctrines applicable under the competition laws of some Members, a firm complying with a specific legislative requirement of such a Member (e.g. a trade law authorizing private market-sharing agreements) may be immunized from being found in violation of the general domestic competition law. The reason for these doctrines is that, in most jurisdictions, domestic legislatures have the legislative power to limit the scope of competition legislation. International commitments made under the GATS "for the purpose of preventing suppliers ... from engaging in or continuing anti-competitive practices"⁹⁹¹ are, however, designed to limit the regulatory powers of WTO Members. Reference Paper commitments undertaken by a Member are international obligations owed to all other Members of the WTO in all areas of the relevant GATS commitments. In accordance with the principle established in Article 27 of the Vienna Convention⁹⁹², a requirement imposed by a Member under its internal law on a major supplier cannot unilaterally erode its international commitments made in its schedule to other WTO Members to prevent major suppliers from "continuing anti-competitive practices".⁹⁹³ The pro-competitive obligations in Section 1 of the Reference Paper do not reserve any such unilateral right of WTO Members to maintain anti-competitive measures.

7.245 For these reasons, we conclude that practices required under Mexico's law can be "anti-competitive practices" within the meaning of Section 1 of Mexico's Reference Paper.

3. Do the ILD Rules require a major supplier to engage in "anti-competitive practices"?

7.246 We now examine whether, as the United States claims, the ILD Rules do require "anti-competitive" practices by "suppliers who, alone or together, are a major supplier", and would therefore not be "appropriate measures" within the meaning of Section 1 of Mexico's Reference Paper. We first identify the relevant requirements placed by the ILD Rules on Telmex and other Mexican operators, and then assess whether these requirements would constitute "anti-competitive practices."

(a) What acts do the ILD Rules require of Telmex and other Mexican operators?

7.247 The relevant measures invoked by the United States are the ILD Rules that require Mexican operators to apply a "uniform settlement rate", and to ensure a "proportionate return" of incoming calls, compared to outgoing calls.

(i) Uniform settlement rate

7.248 The ILD Rules require all "international gateway operators", including Telmex, to apply a uniform settlement rate in the following terms:

"[t]he same settlement rates are applied by international gateway operators to all long-distance calls from a given country, regardless of which operator originates the call abroad and which licensee terminates the call within Mexican territory."⁹⁹⁴

7.249 The uniform settlement rate is implemented through ILD Rule 13, which gives the Mexican operator with the greatest share of outgoing calls to a particular country in the previous six months � in this case Telmex � the sole right to negotiate settlement rates with the operators of that country. ILD Rule 13 states:

"The long-distance service licensee having the greatest percentage of outgoing long-distance market share for the six months prior to negotiations with a given country shall be the licensee that is authorized to negotiate settlement rates with the operators of said country. These rates shall be submitted to the Commission for its approval."⁹⁹⁵

7.250 Telmex is an "international gateway operator", and the "long-distance service licensee" authorized to negotiate settlement rates with United States operators on the United States � Mexico route.

(ii) Proportionate return

7.251 The ILD Rules also require international gateway operators to apply the system of "proportionate return", and distribute among themselves incoming calls from a country in proportion to the outgoing calls the operator sends to that country.⁹⁹⁶ The system is implemented through ILD Rule 16 and 2:XIII.

7.252 Rule 2:XIII sets out, in relevant part, the principle of the scheme:

"international gateway operators shall have the right to receive, regardless of the type of call, incoming call attempts from a given country during any one-month period, based on the percentages established for the previous monthly period."⁹⁹⁷

7.253 Rule 16 provides for the redistribution of calls:

"In the event that an international gateway operator receives a greater share of incoming traffic than that to which it is entitled under the terms of subparagraph XIII of Rule 2, the operator shall distribute the surplus to another international gateway operator as to remain within the bound of its own percentage."⁹⁹⁸

7.254 In redistributing the incoming traffic, ILD Rule 17 provides that operators may also "negotiate financial compensation agreements among themselves, according to the rights that are generated for each of them". These agreements are notified to and approved by Mexican authorities.⁹⁹⁹

7.255 The principle of a uniform settlement rate must be applied by operators to all international incoming and outgoing traffic, and the principle of proportionate return must be applied by operators to all international incoming traffic, and both must appear in all interconnection agreements made by Mexican operators with foreign operators.¹⁰⁰⁰

7.256 In sum, these measures impose two main requirements on Telmex, which is the "major supplier", on the United States � Mexico route. First, Telmex must negotiate a settlement rate for incoming calls with suppliers in the other markets wishing to supply the Mexican market and apply, subject to approval by the Mexican authorities and in common with the other Mexican suppliers, that single rate to interconnection for incoming traffic from the United States. Second, Telmex must give up traffic to, or accept traffic from, other suppliers depending on whether the proportion of incoming traffic surpasses, or falls short of, its proportion of outgoing traffic. To this end, Telmex may enter into "financial compensation agreements"¹⁰⁰¹ with other operators, which are to be approved by Mexican authorities.

(b) Are the acts required of Telmex and other Mexican operators "anti-competitive practices"?

7.257 The United States argues that the uniform settlement rate (that restricts price) together with the proportionate return system (that allocates market shares) has the "classic features of a cartel".¹⁰⁰² According to the United States:

"It is the setting of the rate by the monopolist (since Telmex is given the exclusive authority, it is acting as a monopolist in this context) and the use of this rate by all other suppliers (horizontal price fixing) that comprise the anti-competitive practices that form the basis for the United States' claim under Section 1 of the Reference Paper."¹⁰⁰³

7.258 Mexico argues that the principles of uniform rates and proportionate return contained in the ILD Rules in fact favour competition. According to Mexico, the uniform rate requirement protects new entrants from predatory pricing by incumbent suppliers, and from being played off against each other by major foreign operators, while the proportionate return system prevents foreign operators from imposing predatory pricing on their Mexican affiliates.

7.259 In addition, Mexico states that it differs with the United States with respect to the relevant market in which competition must be promoted and protected.¹⁰⁰⁴ Mexico states:

"Mexican policy, as shown by the ILD Rules, is that domestic carriers should share in and split agreements for incoming calls in terms of their success in securing a share on the domestic market and generating outbound calls. The United States sees it differently � the only market worth protecting is the one for terminating United States traffic to Mexico. The United States is acting as if new operators should compete to carry incoming international traffic calls instead of competing for new customers in Mexico. According to the criterion set by the United States, an operator who has made a minimal investment in Mexican infrastructure should be allowed to do so on an unlimited basis, taking all the revenue for international calls from the operators who have made such investments and have obtained successful results in acquiring a share of the market."¹⁰⁰⁵

7.260 We now examine the two specific elements of the ILD Rules that the United States has invoked.

(i) Uniform settlement rate

7.261 With respect to the uniform settlement rate, we have found that the ILD Rules require Telmex to negotiate a price, that is then approved by Mexican authorities and applied by Telmex and the other Mexican suppliers to the termination of the services at issue. Mexico justifies this uniform pricing scheme as pro-competitive since, according to Mexico, it removes the possibility that Telmex, or Mexican operators which are foreign affiliates, engage in predatory pricing, or are played against each other by major foreign operators. This Mexican argument admits that one purpose of the uniform pricing requirement is to limit price competition such as "predatory pricing". Yet Mexico gives no evidence that its existing competition laws are inadequate to deal with predatory pricing, or that it has well-founded reasons for believing that predatory pricing or unfair treatment by foreign affiliates would occur in Mexico absent the uniform settlement rate in the ILD Rules. Nor does Mexico show that predatory pricing could not be dealt with by telecommunications regulations in ways other than through uniform pricing.

7.262 We find the United States argument convincing that the removal of price competition by the Mexican authorities, combined with the setting of the uniform price by the major supplier, has effects tantamount to those of a price-fixing cartel. We have previously found that horizontal practices such as price-fixing among competitors are "anti-competitive practices" under Section 1 of Mexico's Reference Paper. We have also found that a GATS obligation "of preventing suppliers � from engaging in or continuing anti-competitive practices" cannot be unilaterally abrogated by a national regulation requiring such an anti-competitive practice within the meaning of Section 1 of Mexico's Reference Paper (see paragraphs 7.243 to 7.245 above). For the same reasons, anti-competitive price fixing by telecommunications suppliers cannot be unilaterally exempted from the scope of Section 1 by a government requirement imposing such price fixing. To find otherwise would enable WTO Members unilaterally to detract from the effectiveness of their Section 1 obligations to maintain competitive safeguards by requiring such anti-competitive practices. We find, therefore, that the uniform settlement rate under the ILD Rules requires practices by a major supplier, Telmex, that are "anti-competitive" within the meaning of Section 1 of Mexico's Reference Paper.

(ii) Proportionate return

7.263 With respect to the "proportionate return" system, we have found that Telmex and other Mexican operators terminating the services at issue are required under the ILD Rules to give up traffic to, or accept traffic from, one another depending on whether the proportion of incoming traffic surpasses, or falls short of, their proportion of outgoing traffic. We have also found that Mexico permits Mexican suppliers to negotiate financial compensation agreements between themselves instead of actually transferring surplus traffic among themselves. Mexico justifies this system on substantially the same grounds as the uniform settlement system which the proportionate return system supports. For the reasons explained already in paragraph 7.261 above, we are not convinced by Mexico's justification of this restrictive allocation among competing suppliers of incoming traffic calls and market shares.

7.264 We find that the allocation of market share between Mexican suppliers imposed by the Mexican authorities, combined with the authorization of Mexican operators to negotiate financial compensation between them instead of physically transferring surplus traffic, has effects tantamount to those of a market sharing arrangement between suppliers. We have previously found that certain horizontal practices, such as market sharing arrangements, are "anti-competitive practices" in Section 1 of Mexico's Reference Paper. We recall our previous finding that practices of a major supplier, even if they result from a legal requirement, can be anti-competitive practices within the meaning of Section 1 of Mexico's Reference Paper. We find therefore that the proportionate return system under the ILD Rules requires practices by a major supplier, Telmex, that limit rivalry and competition among competing suppliers and are "anti-competitive" within the meaning of Section 1 of Mexico's Reference Paper.

4. Has Mexico maintained "appropriate measures" to prevent anti-competitive practices by a major supplier?

7.265 Section 1.1 requires Mexico to maintain "appropriate measures" to prevent anti-competitive practices by a major supplier. The word "appropriate", in its general dictionary sense, means "specially suitable, proper".¹⁰⁰⁶ This suggests that "appropriate measures" are those that are suitable for achieving their purpose � in this case that of "preventing a major supplier from engaging in or continuing anti-competitive practices".

7.266 We recognize that measures that are "appropriate" in the sense of Section 1 of Mexico's Reference Paper would not need to forestall in every case the occurrence of anti-competitive practices of major suppliers. However, at a minimum, if a measure legally requires certain behaviour, then it cannot logically be "appropriate" in preventing that same behaviour. Since we have found already that Mexico maintains measures (the ILD Rules concerning uniform interconnection rate and proportionate return) which legally require anti-competitive conduct by a major supplier, we find that Mexico has failed to maintain "appropriate measures" to prevent such acts, contrary to Section 1 of its Reference Paper. As Mexico has not claimed that its general competition law is applicable to the anti-competitive practices mandated by the ILD rules, we do not consider it necessary to examine the broader issue of whether Mexico's competition laws are, in general, "appropriate measures" in terms of Section 1.1.

7.267 We underline that our interpretation of Section 1 of the Reference Paper does not unduly limit the broad regulatory autonomy of WTO Members in the field of trade in services, including telecommunications. Although we find that measures required by a Member under its internal laws may fall within the scope of Section 1, the measures addressed in the case before us are exceptional, and require a major supplier to engage in acts which are tantamount to anti-competitive practices which are condemned in domestic competition laws of most WTO Members, and under instruments of international organizations to which both parties are members. Section 1 is a voluntary, additional commitment to maintain certain "appropriate" measures, which reserves a degree of flexibility for Members in accepting and implementing such an additional commitment. Finally, the measures to be maintained under Section 1 refer only to practices of "major suppliers" and not to those of other suppliers in the market.

7.268 We also recognize that � beyond our findings regarding horizontal price-fixing and market allocations among competing suppliers of basic telecommunications services � the term "anti-competitive practices" in Section 1 of the Reference Paper may be interpreted differently by different WTO Members. Our finding is limited to the interpretation of Mexico's GATS obligations under Section 1 of its Reference Paper, with respect to the United States, and with respect to the very specific anti-competitive measures in the relevant market for telecommunications discussed above.

7.269 We therefore find that Mexico has failed, in violation of Section 1.1 of its Reference Paper, to maintain "appropriate measures" to prevent anti-competitive practices by maintaining measures that require anti-competitive practices among competing suppliers which, alone or together, are a major supplier of the services at issue.

To continue with: D. Whether Mexico has met its obligation under Section 5 of the GATS Annex on Telecommunications

Return to: Table of Contents

924 In the authentic Spanish version:

"Proveedor principal, es aquel proveedor que tiene la capacidad de afectar materialmente los t�rminos de participaci�n en el mercado relevante de servicios b�sicos de telecomunicaciones (teniendo en cuenta el precio y la oferta), como resultado del:
(a) control sobre los recursos esenciales; o
(b) uso de su posici�n en el mercado."

925 See the United States' first written submission, paragraphs 72-78.

926 See Mexico's second oral statement, paragraphs 67-74.

927 See the United States' first written submission, paragraphs 79-81.

928 Mexico's argument on this issue is summarized at paragraph 4.156 of this Report.

929 See the United States' first written submission, paragraphs 82-92.

930 See the United States' first written submission, paragraphs 93-98.

931 See the United States' first written submission, paragraph 107.

932 See the United States' first written submission, paragraph 108.

933 See the United States' first written submission, paragraphs 109 and 112.

934 See the United States' first written submission, paragraph 110.

935 See the United States' first written submission, paragraphs 115-116.

936 See the United States' second written submission, paragraph 68.

937 See the United States' answer to question No. 14(a) of the Panel of 19 December 2002, paragraph 76. For question No. 14(a), see footnote 359 of this Report.

938 See the United States' second written submission, paragraph 71.

939 See the United States' first written submission, paragraph 107.

940 See Mexico's second written submission, paragraphs 87-97.

941 In the authentic Spanish version: "en ... tarifas basadas en costos que sean �, razonables, econ�micamente factibles".

942 The Shorter Oxford English Dictionary, 3rd edition, (Clarendon Press, 1990), page 1463.

943 ITU Recommendation ITU-T Rec. D.140 (06/2002) paragraph 1.

944 ITU Recommendation ITU-T Rec. D.140 (06/2002) paragraph 2.

945 ITU Recommendation ITU-T Rec. D.140 (06/2002) Annex A.

946 ITU Recommendation ITU-T D.150, (06/1999) paragraph 2. Although the Recommendation uses the form "cost-orientation", we do not attach any interpretative significance to this.

947 ITU Recommendation ITU-T Rec. D.140 (06/2002) Annex F.

948 ITU, Trends in Telecommunications Reform: Interconnection Regulation, 3rd edition, sec. 4.2.1.2, p. 40. This paragraph also states that countries that apply long run incremental cost methodologies include United States, Australia, EC, Colombia, and South Africa, and that "numerous developing countries have adopted or proposed" some form of this model.

949 ITU, Trends in Telecommunications Reform: Interconnection Regulation, 3rd edition, sec. 4.2.1.2, p. 40.

950 Federal Law on Telecommunications, Article 63.

951 In the authentic Spanish version:

"(b) de manera oportuna, en t�rminos, condiciones (incluyendo normas t�cnicas y especificaciones) y tarifas basadas en costos que sean transparentes, razonables, econ�micamente factibles y que sean lo suficientemente desagregadas para que el proveedor no necesite pagar por componentes o recursos de la red que no se requieran para que el servicio sea suministrado;... ".

952 Black's Law Dictionary, 6th edition, 1990.

953 See Panel Report, US � Stainless Steel, paragraph 6.75.

954 The Shorter Oxford English Dictionary, 3rd edition, (Clarendon Press, 1990), Vol. II, page 1758.

955 Ibid.

956 The Appellate Body in US � Hot-Rolled Steel stated: "�The word 'reasonable' implies a degree of flexibility that involves consideration of all of the circumstances of a particular case. What is 'reasonable' in one set of circumstances may prove to be less than 'reasonable' in different circumstances. This suggests that what constitutes a reasonable period or a reasonable time, under Article 6.8 and Annex II of the Anti-Dumping Agreement, should be defined on a case-by-case basis, in the light of the specific circumstances of each investigation. In sum, a "reasonable period" must be interpreted consistently with the notions of flexibility and balance that are inherent in the concept of "reasonableness", and in a manner that allows for account to be taken of the particular circumstances of each case. This was in the context of the Anti-Dumping Agreement, but we believe it is equally pertinent in the context of GATS." See Appellate Body Report, US � Hot-Rolled Steel, paragraphs 84-85.

957 Article 7(2) of the EC Interconnection Directive (Directive 97/33/EC) of 30 June 1997 on interconnection in Telecommunications with regard to ensuring universal service and interoperability through application of the principles of Open Network Provision (ONP), (OJ 1997 L 199, p. 32) which provides "[c]harges for interconnection shall follow the principles of transparency and cost orientation. The burden of proof that charges are derived from actual costs including a reasonable rate of return on investment shall lie with the organization providing interconnection to its facilities".

958 See e.g., question No. 11 (a. Does Mexico consider that the estimates of the cost of terminating incoming international calls in Mexico given in the United States submission are roughly correct? b. If not, please give reasons and outline how more satisfactory figures might be obtained) at the first meeting of the Panel; questions No. 12 (Is there a margin for an adequate rate of return that can be interpreted into the terms "cost-oriented rates that are � reasonable." If so, what would be an adequate margin of return. Please provide examples.) and No. 14 (How do Mexico's considerations on elements to be included in the establishment of cost-oriented rates relate to its obligations under Section 3 of its Reference Paper?) at the second meeting of the Panel.

959 See Mexico's first written submission, paragraph 186.

960 See Mexico's answer to question No. 11(b) of the Panel of 19 December 2002. For question No. 11(b), see footnote 407 of this Report.

961 See paragraph 7.188 and footnote 958.

962 See ITU-T Rec. D.140, footnote 945.

963 See the United States' first written submission, paragraph 124.

964 The company is Arbinet. See the United States' first written submission, footnote 134.

965 Arbinet.

966 Arbinet prices on 13 September 2002.

967 ILD Rules 2:XIII, 16, 17.

968 See United States' first written submission, paragraph 153.

969 See Mexico's second oral statement, paragraph 81.

970 Weighted by distribution of traffic from ATT to Telmex in March-May 2002.

971 Price per minute of circuits between Los Angeles, New York, and London and selected destinations in Mexico as posted by Arbinet, a major traffic exchange company, on 13 September 2002. Figure shown in table is simple average of figures for individual destinations. Includes international transmission in addition to termination in Mexico.

972 The simple average of wholesale termination rates of a major operator in 29 countries having several long-distance providers. The United States lists these countries in a table in paragraph 146 of its first written submission, and claims that the rates are those posted by Arbinet on 13 September 2002.

973 See the United States' second written submission, paragraph 68.

974 See Mexico's second written submission, paragraph 103.

975 See paragraph 7.180

976 In the authentic Spanish version:

"1.1 Prevenci�n de pr�cticas anticompetitivas en telecomunicaciones:
Se mantendr�n las medidas apropiadas, con el prop�sito de prevenir que, los proveedores que se constituyan, de manera individual o conjunta, como proveedor principal, se involucren en, o contin�en con pr�cticas anticompetitivas."

977 See paragraph 7.159 of this Report.

978 The Shorter Oxford English Dictionary, 3rd edition, (Clarendon Press, 1990), Vol. II, page 1645.

979 Ibid, page 382.

980 Ibid.

981 Merriam Webster Dictionary, Merriam Webster Online, 2003; http://www.webster.com/.

982 "Overview of Members' National Competition Legislation", Note by the Secretariat, WT/WGTCP/W/128/Rev.2, 4 July 2001.

983 Ibid.

984 United Nations Set (1980), Part D, paragraph 3.

985 OECD Council Recommendation Concerning Effective Action Against Hardcore Cartels (adopted by the OECD Council at its 921st Session on 25 March 1998 [C/M(98)7/PROV]).

986 Report (2002) of the Working Group on the Interaction between Trade and Competition Policy to the General Council (WT/WGTCP/6), paragraph 61.

987 Report (2003) of the Working Group on the Interaction between Trade and Competition Policy to the General Council (WT/WGTCP/7), paragraph 41.

988 See the United States' answer to question No. 23(a) of the Panel of 14 March 2003, paragraph 47. For question No. 23(a), see footnote 545 of this Report.

989 See the European Communities' third party submission, paragraph 53.

990 See the European Communities' third party submission, paragraph 49.

991 Section 1.1 of the Reference Paper.

992 See the Vienna Convention on the Law of Treaties, 1969, Art. 27. See also Ian Brownlie, Principles of Public International Law (Clarendon Press, 1998, 5th ed.), page 34.

993 Section 1.1 of the Reference Paper.

994 Rule 2:XII(a), also confirmed by Rule 10.

"Regla 2. Para efectos de las presentes Reglas, los siguientes t�rminos tendr�n el significado que a continuaci�n se indica:
XII. Sistema de tarifas de liquidaci�n uniformes: aqu�l por el cual:
a) las mismas tarifas de liquidaci�n son aplicadas por los operadores de puerto internacional a las llamadas de larga distancia provenientes de un pa�s determinado, independientemente del operador que las origine en el extranjero y del concesionario que las termine en territorio nacional, y �"

995 ILD Rule 13.

"El concesionario de servicio de larga distancia que tenga el mayor porcentaje del mercado de larga distancia de salida de los �ltimos seis meses anteriores a la negociaci�n con un pa�s determinado, ser� quien deba negociar las tarifas de liquidaci�n con los operadores de dicho pa�s. Estas tarifas deber�n someterse a la aprobaci�n de la Comisi�n."

996 ILD Rule 2:XIII.

997 "los operadores de puerto internacional tendr�n derecho a recibir, en forma aleatoria respecto del tipo de llamada, los intentos de llamadas de entrada provenientes de un pa�s determinado en cualquier periodo de un mes, en funci�n a los porcentajes establecidos en el periodo mensual anterior".

998 "En caso de que un operador de puerto internacional reciba tr�fico de entrada en una proporci�n mayor a la que le corresponde conforme al inciso XIII de la Regla 2, dicho operador deber� distribuir a otro operador de puerto internacional el excedente para cumplir con el porcentaje correspondiente. En tal caso, el operador deber� descontar la contraprestaci�n a que tiene derecho por prestar los servicios de conmutaci�n, enrutamiento y contabilidad en el puerto internacional, y pagar el monto restante de la tarifa de liquidaci�n a los operadores de puerto internacional a los que transfiera dicho tr�fico. A su vez, estos �ltimos deber�n pagar la tarifa de interconexi�n correspondiente al operador local que termine la llamada."

999 ILD Rule 17.

1000 ILD Rule 23.

1001 ILD Rule 17.

1002 See the United States' first oral statement, paragraph 38.

1003 See the United States' answer to question No. 23(a) of the Panel of 14 March 2003, paragraph 47. For question No. 23(a), see footnote 545 of this Report.

1004 See Mexico's answer to question No. 25 of the Panel of 14 March 2003, paragraph 132, ("Please explain whether the effect of Rule 13 of the ILD Rules is pro-competitive or anti-competitive, and support your argument with the appropriate illustrative figures and examples".).

1005 See Mexico's answer to question No. 25 of the Panel of 14 March 2003, para 132. For question No. 25, see footnote 1004 of this Report.

1006 The Shorter Oxford English Dictionary, 3rd edition, (Clarendon Press, 1990), page 94.

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