Ohh, you're absolutely right. It should be set to 1. And according to PayPal API (as I know) it should ignore shipping addresses if this case
One additional thing to note, which took me an hour or two to figure out, is that even if you set the no_shipping to 1, you won't get the desired result unless you also remove the address_override=1 from the existing paypal standard plugin. Do you know if this will negatively effect anything else? I get the desired result this way (billing address is prepopulated, and the next screen shows no shipping address).
If this is being considered a bug to be fixed, just make sure to set the first flag to 1, and also remove the address override.
Thanks for the help.