Yes, service charges based on mileage of the flight have been eliminated. Only airport taxes and fees--particularly for International flights--are collected. In fact, they made a big deal not long ago that a new policy would be that if there is a seat available in First Class, the next non-rev on the standby list gets it at no charge since service charges are eliminated. I haven't seen that policy in actual operation so far. Usually what happens is the agent upgrades a coach revenue passenger and then the non-rev is given the coach seat
You should not list the children under age 6 for F/C. From the Travel Manual: "Children, under the age of six (6) may only travel in the Main Cabin, this includes infants." That part is understood. What I don't understand is why the agent would care whether or not some "undeserving" coach revenue passenger(s) gets upgraded in order to accommodate a non-rev or non-rev and family. It may be that there were not enough vacant seats in coach to accommodate you and your family even with upgrading. Of course, I have seen some agents that choose to ignore corporate policy on such matters because they just don't happen to agree with the policy.