It's think supposed to be red when powered but not working and green but working. I don't think it has to be activated for the LED to come on at all.
I've gone through two of these and haven't been able to get either to power up. A guy in the Sirius Backstage Forums said he went through three before he got one that powered up. Like me, he was attempting to use his (though of course he has succeeded and I have not) with an Onkyo receiver. Some of the people on the Backstage forum recommended connecting the cables in a specific order--8-pin, then power, then antenna--to maximise chances of success.
I received my first apparent-dud sc-h1 as a freebie in April and then purchased my second at my local Circuit City last week. Needless to say, it's going back; annoyingly, however, they don't have any more in stock so I can't exchange it and try another. I'll be able to get a refund, of course, but trying another would be nice.
If this is a known problem with a documented fix, however, bring it on! I'd much rather solve the mystery than return my SC-H1 and have the saga drag on and on...