Yeah, the textSelection plugin basically abstracts away browser differences when it comes to dealing with text areas. The CodeEditor plugin uses a totally different text surface. You should see #wpTextbox1 here more as the form value, then a input field in the case of CodeEditor. It has a basic implementation of textSelection API, which allows it to 'communicate' it's value trough the text area object, but it uses a totally different text surface to draw the value.
The textSelection plugin is not fully implemented however (neither for textareas nor for CodeEditor). Notably the 'setContents' method is missing, which would be used for what you describe. But ou can select and then insert characters in the selection (encapsulateSelection allows this).
We ought to improve this at some point. The textSelection plugin is a remnant of the iframe wikicode highlighting experiment of the 2010 WikiEditor that got cancelled, so it hasn't seen too much action since then. It's currently only used for special character insertion.