I see what you are trying to say that each repeating device is a receiver and transmitter. Each transmitter and receiver has its own set of keys, this is true but the encryption is not set to a key and each device generates its own KSV because the keys themselves are not transmitted.
It clearly states all the KSVs of downstream devices are passed back to the source for authentication. The source uses an XOR of a calculation of the KSVs to encrypt the data. This would be Ks the secret session key and all devices have to come up with this calculation and they must match. The encryption is not set to a given key by any device but the whole process is started and controlled by the source. A repeater (AVR) cannot act independently without the sources permission which is what your examples about separate authentication/encryption keys (KSVs) would allow.
