Chevrolet Repair: 98 Chevy Blazer Shifting problem, chevy blazer, problem manifests

Question
I have a 98 Chevy Blazer 4x4 that I am having a recurring/ intermittent problem.  The vehicle runs fine when everything is cool.  It starts up fine and runs fine until it has been running for about 15 minutes or so.  When the problem is present it won't shift out of 2nd gear, the speedometer fluctuates up and down and there is a smell that distinctly reminds me of a burning wire.  I can shut the vehicle off for a couple of minutes and the problem subsides until it has been running for about 15 minutes again.  I took it too the dealership and they said that the "Transmission" was "Burned up"  Only problem is that I have had the transmission serviced on a regular basis. I checked the transmission fluid in it and it was in good condition and does not appear burnt or degraded in any way.  The transmission also shifts perfectly and positively when the vehicle is cool.  When the problem begins to manifest itself it seems like there is something electronic triggering a kickdown into the next lower gear. I would describe the behavior as "Surging" as the transmission appears right at the threshold where it wants to shift up/down. When the vehicle comes to a complete stop it starts out in 2nd gear and will not shift into third.  The behavior somewhat reminds me of the problem caused on older vehicles when the vaccuum modulator on the transmission was disconnected. Some articles I have read online suggest the problem might be a faulty ignition switch. I thought it might be a faulty speed sensor of some sort, but the burning wire smell leads me to believe the problem is entirely electrical and not mechanical.

I am convinced the transmission is not burned up as there is no slipping at all, the fluid is in good condition, no metal flakes or shavings present and when the problem manifests iteself there is an odor that smells like burning insulation of some sort (Not the smell of oil burning).  Would you happen to recognize these symptoms?

Answer
Hello Gerald,
A few things come to mind, and I really like your comparison to a vacuum modulator.

The things that come to mind are, there is separate oil in the transfer case, so check its condition also, just to eliminate it, although if it were getting hot enough to bog it down that much, I doubt it would cool in 15 minutes.
But that's where the vehicle speed sensor is, so check it.

The parking brake would bog it down, though, and cool about that quick. Any chance it is dragging?
There is a lot of talk in a GM forum I frequent about some clips on the parking brake shoe, allowing it to drag and wear out, but mostly I have heard about it on Suburbans, and Silverados.
The forum is free, and very interesting. A great place to air a question. Go browse a while, then sign up. It is totally free, and the only mail you get is answer notifications. I am Fixitfox33 on that forum. Say hi sometime.

http://www.chevytalk.org/

I agree about the lack of slipping also. If the tranny is worn out, it should rev and hunt, and obviously slip and jerk.

How about your front brake calipers? Make sure they are releasing. If not, you should feel heat from them.

Van