Thanks very much for the quick reply.
Its all very confusing to me.
You may very well be right that the "blue light" only illuminates when detecting Dolby digital sources.
Unfortunately, Sony customer service and Sony technical service in Laredo, Texas do a very poor job of understanding and explaining to the consumer how AFD works.
I've owned this receiver about 2 years and while watching TV with AFD auto setting, the light would appear.
Then, after switching from a recorded program from my Tivo back to live TV the light would not appear and no audio from rear speakers.
That's why I assumed the AFD auto function was and still is not working.
Finally, after reading an online comment on AVS forums, I changed my settings to AFD multi stereo so that my back speakers have audio.
I'm still unsure why the light would sporadically illuminate while watching live TV then not illuminate when switching from recorded TV back to live TV.