I don't run FTP servers on my hosts. Here is how I make it work for me.
I've just put up a fresh test 2.7 install using SVN. Using the ZIP file would have been identical, I just like SVN.
The webserver does not have any write permissions to any wordpress files or directories. The files and directories are all owned by root and my webserver is running as user www-data.
When I try to install a plugin via Plugin -> Add New (I'm aiming for Viper's Video Quicktags, a favorite of mine) I get the Connection Information page for installing a plugin. It's asking for FTP info.
That's expected since my WordPress 2.7 does not have the ability to write to the directories it needs to. It's asking for FTP info hoping that the FTP credentials will be able to write the files it needs to.
I don't run a FTP server on my host. I dislike FTP. What I do is this:
I now run these commands in my wordpress directory:
find wp-content | sed -e 's/\ /\\\ /g' | xargs chown www-data:www-data
find wp-admin | xargs chown www-data:www-data
The first line gives my webserver ownership of all the files and directories in wp-content. That will let the webserver write anything it needs to in wp-content. I add the sed portion because some of my directories and files have spaces in the names.
The second line does the same thing for wp-admin. I don't have a good reason why WordPress needs that to be writeable or own those files but it wont work otherwise.
Now I try the exact same operation for installing plugins. This time I pick WP-SuperCache. Plugins -> Add New, search for WP-SuperCache, look at it, and click on the orange Install Now button.
Poof, it works. I activate the plugin and I'm all set.
The automatic upgrade works the same way except you need to have the webserver process own all the wordpress/ files and directories.
There are configurations using suPHP but I've not tried it so I can't speak to that.
Also I doubt that I'll use automatic upgrade for 2.7 to go to the next version. I find SVN too easy for me to use.
Let me know if this helps.