Similar experience, phone agent insisted that I needed to pay (non USD500, but not zero either) plus 20k miles to upgrade domestic leg of an international itinerary. :*

In the end when informing her that elites do not have fees for domestic upgrades, just the 15k miles, she told me it would still be 20k since it was part of an international itinerary, decided to just take it and sort it out later...

The domestic leg is now shown as waitlisted on my res, so at least it came through.