Heeeerrre I come to save the daaaayyyy!!!!
This sounds like a job fer mighty mouse, but since he is busy, you're going to have to settle for me. First of all, your PR (pressure regulator) valve is located in the transmission pump housing, not in the control valve body. But let's not worry about that yet. Trust me - I is a perfesh'nal.
Firstly, I assume you have checked the fluid level of your properly warmed up transmission while it was running in park and on a level surface. TH400 transmissions are a little sensitive to fluid levels being too high. If it is in the good zone, You need to do this on your test drive: get on a level roadway and cruise up to about 40mph. Let her coast a bit at that speed, then mash it all the way to the floor and see if she will kick down from 3rd to second gear. If she does, then see what the engine RPM does. If it flares, that is seems to act as if it were suddenly in neutral, it is time for a rebuild. But since your fluid smalled ok, this is probably not the case.
I seriously doubt it is your vacuum modulator, as this gizmo is used to downshift, or keep it from shifting up. But to check it properly you need to see how much vaccuum you are getting to your modulator. It should be around 14 inches at idle. You can check it with a cheapo-brand vaccum guage available at most auto parts stores.
Assuming these test both are fine, I would next take and remove your governor cover, located toward passenger side rear of the trans, by unscrewing the four bolts that hold it secure. Next, pull the governor assembly out by gently pulling and letting it turn a little as you do so. Hold the governor by the helical gear with the other end down and look at the grooved ports between the polished areas on the shaft. While you are looking at these, slowly squeeze the weights in and out on the end. You should see a piston inside the shaft moving up and down in response to how the weights are moved. If you don't, the piston is stuck, and you will need to disassemble the governor to fix it possibly, or you may be able to use compressed air to clear it. If that is the problem, let us know, and I will guide you through rebuilding your governor assembly. The governor works in see-saw fashion with the vacuum modulator. The governor directs hydraulic pressure toward your valve body to make it upshift, whereas, as previously mentioned, the vacuum mod directs it for a downshift or to keep it from upshifting as the revolutions of the output shaft increase. This is why you screw the little screw in inside the modulator to make it shift a little later and firmer. You are actully adding resistance to the vacuum being applied by engine RPM against the diaphragm inside the vacuum modulator's housing. Makes sense? The governor's weights want to move outward as RPMs increase, but at the same time, they are held inward by hydraulic pressure being pumped into the shaft via the governor feed circuit in the case.
When you start out driving, weights slowly move outward as the centrifugal force helps them overcome feed pressure. When they finally do so, an upshift occurs. Afterward, the feed pressure is then decreased with engine RPM, but slowly increases with the engine RPM until it once again overcomes the weights which are now turning even faster. It's really quite a simple system. One other thing that might keep it from upshifting automatically is a stuck vacuum modualtor valve inside the transmission. You can reach this valve by pulling out your modulator and sticking a CLEAN magnet inside the hole. The valve should pop right out as soon as you stick the magnet a little way inside, and when it does come out, be prepared to catch some transmission fluid with it.
If the governor's piston moves inside the shaft with no problem, reinstall the governor back into the case, and wiggle it up-and-down and side-to-side to see how much play there is between the case's governor bore and the governor's shaft. There should be almost no play to no play at all. If there is a bit of play there, you are losing hydraulic pressure via the governor circuit. This is fairly common, and can be fixed with a special repair sleeve, or a new case.
If all this checks out ok, then it is time to drop the pan and see what your filter looks like. There are two types of filter media, but the outside case of the filter is the same, and after opening it up with some side cutters, you can see what parts may be worn, if any debris is found inside. Your pan's magnet will also tell a story. Let me know what you find, and I will be glad to diagnose the problem, as it does sound a little like a transmission thing.
One other item I would check is your engine's fan clutch. If it is very stiff, it will drain power, and cause your transmission to mismatch the gears to the load...
If after all this, you decide you want to rebuild her, I might be able to save you money over ebay by selling you a master rebuild kit, and ATSG manual for TH400 at my cost plus shipping. I would also strongly recommend a transgo shift kit as they are very high quality for the best price possible.
"Extension basically" This plastic part can be thrown into the trash or recycle it!