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Thanks for the update and the diagnostic info. As Don mentioned, I would suspect the kickdown cable.
As per the info you've provided, you've eliminated about 50% of the troubleshooting tree on page 28 of Volvo Service Manual TP30868/2 (it's for a 240, but the trannys for both cars are either AW70 or AW70L).
Following the remaining steps, verify that your throttle cable is properly set (and correct if it isn't). Next, check the gear selector setting for proper positioning. If that passes, check your line pressure and the stall speed (probably 2,200 rpms, but the exact value isn't listed in my book since you have a different vehicle).
If either the line pressure or stall speed test fails, then remove the tranny pan and check for paritcles. If particles, then dismantle the tranny and valvebody until you find the problem. If no particles but you did fail either your stall speed test or line pressure test, then the problem is with the Valve Body. Check all the following within the Valve Body: Primary Regulator valve, throttle valve (is the washer in place?), shift valves 1-2 and 2-3, and finally the cutback valve. If all these turn out to be good, then you may have serious issues with the clutches and brakes, a seized oil pump and center support, or damaged o-rings on the pistons.
If you did pass your stall speed test and the line pressure test (as mentioned above), then check the regulator pressure (page 42). If the pressure varries with speed, then follow the operations in the above paragraph that starts with removing the tranny pan. If the regulator pressure does not vary with speed, then the problem is in the governor: Remove the extension housing and check the governor function on the output shaft. Check the plugs in the governor and make sure that they're intact in proper position. Check the cover plate and gasket for oil passages in gear case, check the governor balance cir-clip, check if the governor has a scored output shaft, and finally check the output shaft oil seal. If the fault remains after this, check the pan for particles and proceed from there (as per instructions above).
I hope this helps and either you or the shop is able to locate the problem. If they're insisting on replacing the tranny without testing, then you may want to seriously consider going someplace else. Swapping Valve Bodies is a heck of a lot easier (and cheaper) than swapping a transmission. If they're not looking through a set of Volvo Green manuals, or following a step-by-step procedure in Vadis, I would advise going elsewhere.
God bless,
Fitz Fitzgerald.
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'87 Blue 245, NA 230K
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