Welcome back, Moonsinger. Gonna play with us a while?
The ruling was specifically aimed at stopping people using the exploit that Qitai discovered with the city ranking of cities closer to the FP than the palace. We may not have got it completely right, but I think after the discussions in this thread so-far that there is a general acceptance that the intent is right, and that the aim is more for setting the spirit-of-the-game, rather than making hard and fast rules to overcome what are viewed to be bugs or weaknesses in the software.
Personally, I am in favour of keeping the ability to move palaces, as from a game design perspective it allows more flexibility. Perhaps it is exploitive with the AI not using it, but (for example) I would sooner stop the free palace jumps than palace moves altogether!
As for the point in your e-mail above: Yes that is fine. You are getting some benefit in those cities around the FP , but the benefit is nowhere near the scale of the 'infinite distance' bug.
As for moving the palace around and building up cities near it, that is fine too, depending on the implimentation. Building far away, waiting 100 turns and then building around the new capital would not be allowed. Just build the core if cities all around the same time as you move the palace.