I'll try to explain this as clear as possible without confusing everyone.... you can't upgrade because it is combined with HHN. The HHN "value" of the ticket has nothing to do with a Power Pass because Annual Passes only work during the day and have nothing to do with HHN. Therefore, that "value" cannot be applied towards an Annual Pass.
It's the same reason you cannot upgrade tickets combined with Express. Again, the "value" of the Express portion of the ticket has nothing to do with an Annual Pass.
Say you bought your 3 day ticket and HHN ticket separate. They wouldn't subtract the cost of both the 3 day ticket and HHN ticket off the cost of an Annual Pass. They would only subtract off the cost of the 3 day ticket.
You're correct about the first part; however, the 2 day tickets with 3rd day free can be upgraded because essentially they're just a 2 day ticket (the 3rd day has no value).
Discounted tickets can usually be upgraded, but you lose the discount essentially. So, the upgrade would be the difference between the ticket and the Annual Pass, PLUS the amount that was initially discounted.