Bethesda is not really in the habit of fixing bugs and I doubt they will address that one either.
Not sure way I have to copy and paste from the manual again and again:
With TexGen.exe most but not all object LOD source textures can be generated from the full textures in the current load order.
It is obvious that terrain LOD texture generation does not matter to TexGen or object LOD texture generation or vice versa.
Is BC7 quick or max not a suitable option for normals in SE win 7/win 10 ? Since that is what I am using for diffuse. But in your recommendation you only mention 565 (windows 10) or DXT5 (windows 7)