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Does the biodiesel sold here in Houson meet these criteria?
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Ask. Find a station that sells it and ask them if it meets the standards.
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Is Mercedes being overly conservative?
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Yes, for their own protection. BioD in the states varies widely from station to station as there are no concrete quality standards required for it. They set the limit low to protect themselves from a potentially large number of warranty claims from poor fuel quality.
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Can you actually run a higher percentage blend? (B-20)
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Yes, if you want to immediately void your warranty.
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Will running biodiesel adversely affect my engine?
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Probably not. Willie Nelson had issues with his fuel lines melting with B100.
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Can Mercedes tell when servicing the car whether it has been using biodiesel, and if so, can they tell what percentage blend I have been using.
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Yes, they have tests for it. However, they will likely not check unless they have a reason to suspect it's use (Bumper stickers, you say something about it, etc) or a fuel/engine related part has failed. Unfortunately, there
are some crooked dealers out there that will "overlook" its use.
It's all up to you and if you want to risk it. Retail B5 is all you can use if you want to keep your warranty, WVO and SVO are completely out of the question.