In my country (Australia) we are able to ask the mobile provider to disable data on our accounts to ensure we cannot use any at all, and thus cannot be charged for it unwillingly. It might be worth calling up the provider and asking if they can disable the data service.
I'm going to answer the first part of my own question.
After upgrading my iPod Touch to iOS 5, Location Services started working again. Not only did it start working, it's showing the location as a point in the street in front of the house.
1) The location I manually submitted to Skyhook in 2009 was in the street farther south, by the mailbox, so the old data point is not being used. Not suprised since I have no reason to believe that Apple went back to Skyhook. A visit to Skyhook's website verified that this point has not changed.
2) The location that Apple started using last year was a point on the main highway 1/2 mile east of here.
So somehow Apple has independently obtained new data about my wifi location. It's possible that during a recent party, somebody with an iPhone had connected to my Wifi and that data was sent back to Apple. It's also possible that a Wifi data collection vehicle drove down this road. It's very rural with only three homes on a one mile stretch, so although possible it's difficult to believe.
It was my previous understanding that Apple started requiring that devices be within range of several Wifi signals to improve Location Services accuracy. Being in a rural location, it's nearly impossible for my iPod to pick up any Wifi signal other than my own. With Skyhook, this was never an issue.
However, iOS 5 seems to heavily depend on Location Services so maybe they've changed something critical to how it functions in order to improve accuracy without requiring multiple Wifi signals.
I'm going to accept my own answer. If anyone has a better answer to my original question, I'll consider accepting that instead.
Best Answer
After saving image to Photos, open the photos app and double click on your image. This opens your image in a new window. You get a window like the one shown below.
On the top right of the image is a group of icons. Select the first one. See below.
When you select the first icon - a circle with the letter i in it you get a new pop up as shown below.
As you can see at the bottom of this pop up is an area to assign a location. While this may seem tedious, once you go thru it you'll see how simple it is.