I think you are doing a great job and I have to say I agree with everything you have written.
You are consistent, firm yet empathetic. Plus you are clear on why the consequences have happened. It is unfortunate that XP has different views and won't discuss them. It is that classic parents vs grandparents situation where the grandparents only see them a small amount of time so can spoil them but parents have to show proper guidence.
Re: the timeouts - I think like all discipline, they can be used or misused. I think by following what you already do (clear, consistent, firm yet empathetic) then they would be fine.
JMO.