Does it create unbalance between pilots using BACON and those not using it? Yes, if they aren't actively involved in the game, but otherwise not so much. Does BACON benefit the macro farmers and those who set out to abuse EVE? Yes, and if they hadn't written such a program before they sure know about it now and could invent new uses for the idea. At corp and alliance level though, integrating the data from multiple pilots and alts, it clearly advantages the BACON-using side who can create a real-time map of traffic in as many systems as they have alts.
Is it, or should it be, illegal? So far the TOS appears to not be broken but, more to the point, because it accesses local client files, it would be very difficult for CCP or anyone else to prove that there hasbeen unauthorised use of the logfiles. Unless you remove some elements of the logging process, or recode the whole logfile subsystem to encrypt its output, then any external program using that data cannot be stopped. But even that would probably not be sufficient as there are many tech geeks around. Something that made it impossible to run the local logserver without each-time permission from CCP is impracticable and, now the cat is out the bag, one could probably write some Wireshark code to 'watch' the EVE data anyway.
As regards nerfing local, that would just play into the hands of users of BACON and similar programs, giving them a massive advantage over the pilot who actually plays the game in the way that CCP intended. BACON doesn't read 'local', it uses the whole stream of data required by the client, and while there are some arguments to change how local works BACON isn't one of them.
Personally, the level of automation I currently find acceptable ingame is the autopilot. And I don't use that. Tools like BACON, Beetracker, and the rest, using the logfiles for other than their intended purpose are exploits. They can't be stopped by not accepting they exist nor could you say they contravene the TOS without a way to prove that they are actually in use. To stop them requires a change of the logfile format. These tools break the heart of the reason for EVE and produce inequality between pilots and I would support the removal of their ability to continue to work.
IZ
(see http://myeve.eve-online.com/ingameb