Totally avoiding the URLs are too long debate... :)
I am just trying to operate on the priciple of least surprise, so that as little as possible is changed when a user enters a URL for an item, or when one is generated from a title.
I don't like mixed case urls from an aesthetic point of view, but I don't see why it would do any harm as an option to util_text_to_url.
Regarding url-encoding unicode characters - I'm not sure if that is a good idea, wouldn't that mean we get ugly urls like /foo/h%63%81lich/, whereas the current hack for german characters would make that a /foo/haesslich/ ? I think that would defeat the purpose of util_text_to_url.
I, for one, am still very sceptical of (utility) these URLs in all the various languages (and IIRC, they currently work only in MSIE with a 3rd party plugin). Note that English (and for that matter latin alphabet) is not my native language.