Yes! This actually makes alot of sense and I appreciate the time you put into your post!
It seems that everything you said is most likely the case, but of course it isn't conveyed all too well in game due to the lack of zone transitions. Although I do enjoy some of the new gimmicks in Act 1 like the boat (which I didn't initially realize made you go faster the closer you are to the edge), the rest of the new stuff feels like it's actively slowing down the stage, which isn't all that fun considering I always viewed this place as the Chemical Plant of Sonic 3.I also feel that Act 2 is just missing that new and creative edge that makes other returning zones like Chemical Plant so much fun. Even fellow Sonic 3 zones Flying Battery and Lava Reef feel like they made the right changes so that their different enough from the original, but still just as, if not MORE fun.
And related to this stage being "weird", as you mentioned, I also feel that some iconic moments of spectacle from the original are gone. In the original Act 1 when after you go through the wind tunnel at the beginning, you burst through the wall and go flying in the air and Sonic is just like WAAHHHH! only to fall back in the water again. And of course Act 2 with it's infamous wall chase in the beginning, who could forget that? Other stages in the game still seem to keep the memorable moments that made the so iconic, so I feel Hydrocity got the short end of the stick.
And of course, the slide animation was missing at launch but I guess that was due to time constraints, seeing as how it's been brought back in the leaked update. I'd also like if you always started the stage falling like in the original, but now I'm probably starting to sound nitpicky.
All in all, I feel like compared to other returing zones in this game, such as Chemical Plant, Flying Battery, and even Green Hill, something just feels off about this zone, like they could have been a little riskier with Act 2 (and kept it's background, I mean the story implications like you mentioned are pretty vague in game so it probably wouldn't matter) and added more gimmicks from other, possibly non water zones, and made Act 1 a little faster overall.
So that's basically it for this "rant" of sorts. It may come across as nitpicky, but this zone in particular is important to me, and I've been needing to get this off my chest for some time, so hopefully you understand how I feel about this zone. ?