_Cost-oriented interconnection_ . Section 2.2 of the Reference Paper requires that “Interconnection with a major supplier be ensured at...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...”. The U.S. presented several estimations of the cost incurred in terminating international calls in Mexico, based on available information including TELMEX’s domestic interconnection charges, and argued that the settlement rates that U.S. companies were required to pay were above each of these cost estimates - on average 2.5 times higher. Mexico did not offer comments on these cost estimates and settlement charges, and it did not take up the Panel’s invitation to submit is own calculations.

The Panel concluded that the difference between the costs presented to it and the settlement rates was “...unlikely to be within the scope of regulatory flexibility allowed by the notion of cost-oriented rates...” of the Reference Paper.<sup>15</sup> In reaching this conclusion, the Panel emphasized that only costs directly incurred in providing interconnection are relevant.<sup>16</sup> Costs for general development of the network and for universal service programs, in particular, were not deemed relevant to determining the cost basis for interconnection rates. The Panel did not endorse any particular costing model, and recognized that more than one costing methodology could be used, but it stated that incremental cost methods, such as the long range average incremental cost methodology prescribed in Mexico’s telecommunications law for certain purposes, are consistent with this concept.<sup>17</sup> Rather than challenge the cost figures presented by the U.S., Mexico argued that the settlement rates pertained to the international accounting rate regime, not an interconnection regime.<sup>18</sup> At the time negotiations on basic telecommunications services came to closure in 1997, an unbinding understanding had been reached among the negotiating parties that accounting rates would not be used as a basis of disputes. Otherwise, most countries would have found it necessary to file exemptions to MFN treatment under GATS Article II.

The Panel, however, found that the accounting rate regime is subject to the discipline of cost-based interconnection for countries that have adopted the Reference Paper. While the 1997 understanding prevented disputes arising under the GATS framework agreement from different accounting rates with different countries, it did not exempt countries from any of their obligations, including cost-based interconnection, once they had also adopted the Reference Paper.

_Anti-competitive practices._ Section 1.1 of the Reference Paper establishes that “Appropriate measures shall be maintained for the purposes of preventing suppliers who, alone or together, are a major supplier from engaging or continuing anti-competitive practices”. The Mexican rules for international telephone service required that the Mexican operator with the largest outgoing traffic over an international route should negotiate the settlement rate for terminating incoming calls over that route, and required this rate to apply to all operators (‘uniform settlements rates’). Since TELMEX had the 8