Does it costs the networks more to broadcast and carry 2 channels? One SD and one HD?
The short answer is it depends.
If station is broadcasting two different programs then obviously they have the cost of paying royalties on two programs. If they are the same then there is no additional cost.
The reason stations broadcast in both HD and SD format is not about OTA viewer but Sat and Cable. Often Sat and Cable providers have special relationship with broadcast station and get feed directly, not OTA. However in some cases Sat and Cable simply use OTA pickup. Since Cable will convert digital to analog standard definition broadcasting in SD give the station total control over image quality.
I assume over time you will see simulcasting in HD and SD decline.
A station is able to broadcast more programs in SD then HD. So if many programs is more important then video quality they will broadcast multiple SD channels.
Over the air station have 19 Mbps to play with. Precisely how they "spend" it is a business decision, HD or many SD.
So they are using the same equipment and then ether up converting or down converting?
Correct, at the studio filming is done in either SD or HD format. It would be too cumbersome and expensive to have two sets of cameras. Assuming show is filmed in HD it is converted to SD.
Broadcast stations are able to simulcast multiple digital programs for free because they can fit both HD and SD program into a single digital OTA channel.
For Cable it is a different issue. They prefer to carry as many different programs as possible, not different versions of the same program. They have a limited amount of bandwidth. Ideally they would like to get rid of analog completely. In fact I think some MSOs have already done that. Some are looking at giving customers of basic cable a cable ready set top box that works much like the OTA converter box. It converts unencrypted QAM to analog SD NTSC. The converter box is cheap and prevents a lot of complaints by basic cable customers. I use OTA so am not really up on Cable industry.
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