Question: At the end of the first section, inFamous on the PS3 will upgrade the difficulty level from normal to hard (or presumably lower it) based on your performance to that point.

Does anyone know what criteria it's using to assess performance?

I'm interested since I thought it was a nice touch to automatically try and get the game to a suitably challenging / enjoyable level.

Answer: 
I just finished this section a couple of days ago, and my theory is that it is based on both how many times you "die" and how effective you are at killing people. I had no problems with most of the sections (I believe I died once and it was from falling in water), and it set my difficulty to hard.

If you do very well at this, it will set the difficulty higher. If you die a lot, it will set the difficulty lower. If you do about average, it will leave the difficulty at normal.
You must be killing it, I only know that when you consistently die you do down level. I would presume that it is the speed that you are progressing and the fact that you are not taking a lot of damage or dying that much.