Totally agree that 'cheating' to play the game the way it is fun for you is the way to go with SP games. I love that BOH, but I'm just not totally happy with how mundane and easy it feels once you get it.
I was thinking a way to make it more 'balanced' would be if there were some consequences of using it.
Ideally, there would be quests and such that its usage would spark up. For example, a Djinn pops out of the bag and demands that you complete some quests for him or something. Another idea would be, if certain NPCs see you using it it changes their behavior: for example they might try to hunt you down, or they might want to use your bag or something. With something that powerful, you could practically base an entire DLC-sized mod around it!
That is all very complicated, and since it was obviously meant to be a simple straightforward and convenient mod I totally understand how it is, but those would be neat ideas.
Simpler ideas would be: if everytime you use it (click on it), there was a 0.1% (1 in 1000 chance) of something quite suprising happening. For example, if the dice hits 0.1%:
25% chance that it vaporizes all non-quest items in your inventory and in the bag (it should leave the bag intact obviously
25% chance that it opens the nearest Oblivion Gate and teleports you inside
25% chance that it taps into some extra-dimensional space and a diamond worth 10,000 septims teleports inside the BOH
25% chance that the bag (and its contents when you close it) transports to some random container in an Ayleid Ruin somewhere
The script for checking for the 0.1% chance would happen EVERY time you click on the BOH in your inventory (though if you click on it multiple times during one open-inventory session, that should only count as one click). Then if the Surprise Event happens (the 0.1% gets 'rolled' on the 'dice") when you close your inventory, a window pops up to alert you of the event.
If there was a 1 in 1000 chance that something quite unexpected could happen everytime you used the bag, I think it would make it both very fun to use exactly the way it functions, i.e., infinite encumbrance, but also make it quite a spicy meatball.
I can definitely see guys screaming bloody murder when the bag destroys their stuff, so obviously this "Bag of Holding Spice Up" addition would be an alteration/expansion on the basic BOH mod.