I was playing with a MU installation and when i enable sub categories (using list_cats() and with the hierarchical parameter to keep things in order) does not work, reading the code i found out the problem:
the array $defaults inside wp_list_categories() talks about an item called "style", but que parameter $args we pass it came with the item called "list", so when both merge, are two separated items referering the same thing, further in wp_list_categories() when asking what type of listing would it be used, ignores the original option we gave.
Solution: change all items and variables called "list" to "style" in list_cats() and in wp_list_cats().
Maybe is not really a problem, but someone out there still prefers using list_cats()
WP version: wordpress-mu-1.0