I think you are right. I believe getting the locals in HD without HD service is only in MPEG-4 markets, because there aren't SD locals at all the receiver has to tune into the HD channel, if it's already tuning to the HD channel DirecTV has evidently decided to just allow it to ouput the HD signal.
Outside of MPEG-4 markets DirecTV offers SD versions of the local channels. I believe DirecTV takes the OTA HD channel and downscales it to create the SD channel and send it out over the satellites. I believe they talk to the channel provider and get their feedback on how they want the channel sent out (either letterboxed or cropped). I believe that FOX has made a company wide decision that all of their HD channels sent out as SD have to be letterboxed. I believe ABC/ESPN made the same decision. I don't know that any of the others (NBC, CBS, PBS, etc) have made such a decision.
I don't think that there are any MPEG-4 markets in Colorado, so his reciever is most likely only allowed to tune into the SD channels. I don't think you can change the format on the receiver with SD channels being output in SD can you?