It’s currently meant to be working as described in the original post, though we’re investigating a small number of reports where keys are incorrectly being downgraded.
If you do receive a key lower than what you completed in time during the week, please send a Bug Report with the details so we can check it out!
All this is nice, but why not go one step further to make the keystone just what determines the dungeon and let people select the difficulty up to what they have cleared on their character in that expansion?