Level scaling is bad because:
1) Ruins incentive for exploring.
2) Takes away that "on edge" feeling when you are in an unknown zone or dungeon. In Oblivion you could pretty much go anywhere and feel secure.
3) It is the greatest feeling in the world to fight and epic battle where you are over matched, only to win it by pure luck/skill/etc and get an awesome reward like an artifact. If you level scale the artifact it ruins that experience.