Thanks for the response. Your response indicates that this is not a widespread problem, let me try and explain a little more clearly what I am doing.
Actually, what I am doing is going to the existing plan in shipyard, clicking upgrade, changing the engine to a newer one, and changing the name, saving it. Then I go to one of the old ships that is out on patrol on the star map, select it and click the upgrade button under details. The only option I get is scout (whether it is tiny or small hull), I haven't advanced to medium sized hulls yet. I don't see an option to upgrade to the new plan that I just made.
Assuming that upgrading the exact plan of that ship doesn't change the hull size, this should work. This is the exact set of steps I use in dark avatar without a problem. I was wondering if something has changed, or what I am doing wrong.
I also notice that ships created with an AI design, cannot upgrade to the next version of the ai design either. (i.e. defender m1 can't upgrade to defender m2)
I can send a save if it is helpful.
thanks!