Well, after tons of trials and errors I've found something interesting.

I have the Configuration>Customer Details - Customer Default Email Preference set to 1 (HTML)

If I look in Customers>Customers>Edit, it shows the customer's Email Format Pref: as HTML

However, if the customer is logged in, goes to My Account>View or Change my account information, the Newsletter and Email Details shows the TEXT-Only radio button marked. If that is changed to HTML, updated, then all subsequent emails are then sent as HTML.

I am not using newsletters and there is no email preference choice on the sign up page.

So what is happening with the Customer Default Email Preference setting in the configuration?

And why is it showing the customer's Email Format Pref: as HTML?