I'm with Chucara and Tank on the not liking the auto-leveling.
I can see what Night Owl means about the free-form factor being affected by your level. But you have to remember that video games are still kind of constrained to the same rules they always were. (and no I'm not just talking about jumping to san fran, in fallout, I'm talking about the individual choices that lead you there, so I'm not just ignoring your post, NO).
If you could jump straight to killing bowser, the rest of the dungeon and water and fire levels would be pointless. And yes I realize with two warp whistles you can more or less jump to the end, but my point is that every game has a logical progression of the main plot. The Elder Scrolls universe usually did it by giving you a lot of free-form options as well as giving you the main quest. The problem that occurred with the auto-leveling is that it created a "glitch" wherein you could just avoid leveling up and take on the world at level one, which is counter-intuitive to the character development expected. And unlike the RPG element set forth by Final Fantasy, it doesn't behoove you to take the extra time to explore and develop your character before the main plot points, because if you're like me and you became the Archmage of the mage's guild before taking on Kvatch, Martin is completely surrounded by the most powerful demons the realm of oblivion has to offer, which makes the point of him coming into his own and taking on progressively harder enemies as the plot progresses a pointless endeavor.
In the fallout universe, you had to progress the plot in the order that it was given to you, but random encounters gave you the opportunities to become stronger as you went (similar to the Final Fantasy model). And personally, I think that model worked fairly well, given that you don't just see a screen flash and spend all your time killing the same bad guys over and over until you level, you see extra mini-plots being played out.
Besides that (here comes everyone's favorite topic, I get griped at every time I bring it up), the archetype of the hero (there it is) is typically played out over time. He starts out an assistant pig-keeper or a simple farmer or a dead-end job programmer, and goes through a series of progressively harder quests until he's the king of the realms or the Legendary Ring-bearer or The One. If Neo jumped straight ahead to the third movie, the first movie wouldn't have gotten any money (although it would have spared us the disappointment of two progressively worsening sequels).
So in my opinion, to keep the world feeling like it's "free-form non-linear" they can go with what the Elder Scrolls did as far as the world being divided into a "main plot" and the "character development" spheres. I personally feel that the world is more "real" if you wander into an area that can kill you because you're not ready.