I don't think it's an abuse of their authority. As a parallel, I have a friend who runs a website that absolutely bans any real-world political or religious talk. Recently he had to warn people who were quoting scripture in their sigs. His rule was, it doesn't matter if you portray it positively or negatively, it doesn't belong here.
I see Blizzard's position as the same; this is a site for playing a game, not talking about your sexuality, positively or negatively. Roleplay your character however you like, but leave real-life stuff out of it. If that's what they want to do, it's their right to. And, of course, anyone who dislikes that policy has a right to take their business elsewhere.
My only problem right now is that Blizzard seems very vague on what it wants to do. The roleplaying nature of the game adds another difficult aspect to the debate. Which is why I said I'll be interested in seeing how this progresses. This kaffuffle is good because it will force Blizzard to clarify their too-broad guidelines.
Incidentally, I write World of Warcraft roleplaying supplements for Sword & Sorcery, a very gay-friendly company that Blizzard decided to license WoW to. (Sword & Sorcery is owned by White Wolf, one of the first companies to strike sexist language from their books and use homosexual characters in their literature and game book examples).