So I called again this morning and explained the situation to another rep. At my suggestion, it was quickly transferred to her supervisor.

After about 5-10 minutes on hold, the supervisor told me that the hotel will not honor the 20K rate, but was willing to negotiate the rate on a paid stay. As I was told 2 days ago, the hotel was never a Cat 2 hotel and the original booking agent made an error. He offered me these options:

1) He could give me a courtesy 10K points. In addition to the 10K I have in my account, I could buy another 10K for $100, which would give me enough for the award stay. This was unacceptable, since I would never spend 35K/night on a Hampton Inn, especially with the Fess Parker only a few miles away at 40K/night. When I said something about this, the supervisor also said he was surprised that a Hampton Inn was a Cat 5 and had initially thought the property was in NYC.

2) According to the supervisor, the hotel was willing to offer me a rate of $189+209 on a paid stay. This was also not acceptable, since I could have gotten a lower rate ($179) had I booked a paid stay from the very beginning. The supervisor offered to negotiate further on my behalf to get the hotel to match that rate, but I declined, having soured on the whole debacle.

During the conversation, I pointed out that:
a) all my documentation confirms the Cat 2 rate of 20K points/night
b) I had no reason to suspect there was anything wrong with this rate since most Hampton Inns are Cat 2
c) it was my own vigilance that led to the discovery of the mistake. Another customer could have shown up on the day of the stay and been thoroughly upset
d) no attempt was made by Hilton to inform me that an error had been made

I will say that the supervisor was courteous and apologetic throughout the conversation. However, his position was basically that "our hands are tied" because "we work for the hotel," and it's up to the hotel whether they wish to honor the reservation as booked.