Sure, the App Hub site says:
Submit up to five free apps to Windows Phone Marketplace, additional submissions are $19.99 USD
But here's what it really means:
Submit up to five free apps (including updates) to the Windows Phone Marketplace, additional submissions (of apps or updates) are $19.99USD
The policy is simple, just not stated that simply. The first five submissions of any free Windows Phone 7 application - be it a new application or an app update is going to be free, anything further is going to be $19.99USD.
In reality I don't see this affecting the average casual free app developer out there (since they're not making any revenue off this apps and, (very) generally, not submitting that many updates). It will affect those with free apps that have an alternate revenue source (think advertising or subscription) - but since they're actually making money anyway, the $US19.99 shouldn't be a big deal.
Stay tuned for an official blog post from the App Hub team at some point in the near future, and a revision to the wording on the website to clear this up...