The interim ruling was handed out confidentially to the parties late Friday. A final verdict, expected in September, could open the door for billions of dollars worth of Brazilian trade sanctions against the United States.
WTO panels rarely change their findings between preliminary and final rulings, and the apparent result is a major victory for Brazil's cotton industry and West African countries that have claimed to have been harmed by the American payments.
``The panel has recognized most of the points that Brazil has raised,' said Clodoaldo Hugueney, Brazil's ambassador to the WTO.
Hugueney said that Brazilian officials were still studying the ruling. ``But our preliminary reaction is that we are satisfied,' he told The Associated Press.
The office of the U.S. Trade Representative in Washington confirmed the loss.
``The panel found that the changes made by the United States were insufficient to bring the challenged measures certain support payments under the 2002 Farm Bill and export credit guarantees into conformity with U.S. WTO obligations,' it said in an e-mailed statement. ``We are very disappointed with these results.'
The United States has argued that it sufficiently overhauled its cotton regime after scrapping two export credit guarantee programs, and last year repealing the so-called Step-2 cotton-marketing program that made payments to exporters and domestic mill users as compensation for buying higher-priced American cotton.
But the South American country said Washington's continued support for American cotton producers ensured artificially high production and export levels, hurting Brazilian and African producers.
``The compliance panel was senseless. It was obvious we were going to win,' said Pedro Carmargo, who designed the Brazilian agriculture ministry's case. ``The U.S. did absolutely nothing with most of the subsidies. They didn't touch them.'
Brazil has said the U.S. retained its place as the world's second-largest cotton grower by paying out $12.5 billion in government subsidies to American farmers between August 1999 and July 2003. China is the largest exporter of cotton, while Brazil is fifth.
The South American country has reserved the right to impose annual sanctions of up to $4 billion on the United States, but would probably seek less in retaliatory measures because the U.S. has removed some of the offending subsidies. If the final ruling goes against U.S. cotton programs, Washington can still appeal.
Brazil has said it would target U.S. goods, as well as trademarks, patents and commercial services, under provisions in the global commerce body's intellectual property and services agreements.
``In Washington they think the WTO is in project, on top of more than $50 million the city already receives for various energy-efficiency projects.
In return, they are asking that Palm Desert devise a model that can be applied to communities across the state.
``It's a pretty progressive move,' California Public Utilities Commission President Michael Peevey said of the city's energy-efficiency initiative. ``This is not exactly Berkeley or Santa Monica with tofu-eating environmentalists.'
Palm Desert's image as the family friendly cousin to its wilder and better-known neighbor, Palm Springs, is expected to help the effort because it looks so much like many other California suburbs. This is not one of the state's havens for left-leaning activists, but an upscale bedroom community that is home to a regional mall and conservative politics.
City officials recognize that energy use and water consumption and the rising expenses associated with them will remain among their most pressing problems if temperatures continue to climb and water shortages in the Southwest persist, as expected.
``The high cost of energy is a wonderful motivator it's called pain,' said Patrick Conlon, who heads Palm Desert's newly created Office of Energy Management, charged with reducing the city's energy use. ``What we're finding is that not everyone is buying into the ecological message, but they're certainly buying into the economic message.'
So far, the city's initiatives have ranged from innovative installing solar panels above carports to power City Hall to quirky.
Drive-through windows are banned to prevent air pollution from idling cars, public buo it.'
The city has identified its biggest energy-gulpers as air conditioners and pool pumps and is pushing to get older buildings and homes retrofitted. Developers are required to prepare new structures for future solar panels and construct buildings that are 10 to 15 percent more energy efficient.
Such changes could increase home costs between $5,000 and $10,000 in a region where the median price is about $430,000, according to the local building association.
Beverly Bergh, who owned a home in Palm Desert for years, said she has heard mixed reviews from friends about whether the benefits outweigh the cost.
``It depends on how old you are if it's worth it. If you're 70 years old, it's kind of crazy,' said Bergh, who volunteers at the visitor center. ``It's good if you're young enough to benefit, reap the harvest so to speak.'
Officials plan to take advantage of the area's 350 days a year of sunshine. The City Council will consider a plan that would provide significant rebates and low interest loans to business and home owners who install solar panels.
Workers recently installed panels above the carports at City Hall, which are providing more than 35 percent of the complex's electricity.
``On the energy side, they're probably one of the more aggressive cities in the state,' said Fred Bell, who heads the Builders Association of America's desert chapter.
Water is an equally perplexing problem.
Palm Desert began considering conservation after city leaders vis, Calif.
John Phillips who heads the Energy Coalition, an Irvine-based nonprofit that is advising Palm Desert, would like to see the city take its demonstration project further.
He wants the regional utility, Southern California Edison, to pay for energy-efficient air conditioners and link major consumers to a system that would periodically turn air conditioners off during peak times. He also would like to get homes hooked up to a real-time metering program so residents can see how much electricity they're using.
But Conlon, the city's energy management director, warns that there are limits to using technology to solve the energy problem. The city needs to change people's perception of energy and behavior, he said.
``If every time someone turns on a light they could envision dollar signs falling out of a light bulb instead of photons...' he said.
Six months into the project, Palm Desert already has made progress even if it's slight. The city has so far shaved consumption by about 7 percent.
Only 200 million kilowatt hours to go.