Well keep in mind, that just because they are in the process of looking for the problem, doesnt mean that they arent devoting time (read as money to be made while working elsewhere) on your car. Its a normal practice to bill for diagnosis time, and believe me when I say that the dealers will often take ALOT of time troubleshooting a car, and they dont have any regrets about charging you for the diagnosis time.
Atleast he's honest in saying its a 51 dollar sensor, I know alot of mechanics who after 6 hours of diag. time would have been calling for overhauls... whether they needed them or not. If you feel that he's been honest with you, then you shouldnt really have a reason to argue with him