Let me see if I understand this right. He has a shapeshifting power like Human Form that is attached to an IoP. So he doesn't have the IoP unless he is in his beast form? If that is the case, then it doesn't make sense, and you should absolutely call him out on it because he is circumventing the rules meant to keep IoP rebates in check.
Or does he have an IoP that offers Human Form, meaning that his character is not naturally human? If this is the case, then there is nothing wrong with the set up. But, if no other PC is pushed that hard, it can create more work for you as the GM as you try to balance opposition and shift spotlight. (Which are valid reasons to require adjusting a build, by the way.)
Now, as for your philosophical point, where is the line? I don't know that there is an objective line if all of the rules are followed. This is a naturally arbitrary game. The line is wherever you place it. Each time your players roll a Declaration, you are drawing an arbitrary line of whether you will allow it, and again for how difficult it should be. For purchasing powers, as the GM, you can take control of the game and tell your players where the line is, or you can allow them to tell you where they want the line to be.
I have a character that has 17 refresh worth of powers before The Catch and Rebates, including two 0 refresh powers. I wanted to push the bounds with that character, and I wanted him to feel like a real power in the world, so I built in a way that it all makes justifiable sense as far as character is concerned. On the other hand, I would not be surprised if a GM saw the build and told me that there was far too much going on. Another GM might be happy to have the character in his or her game. (See Jake Carrington in my sig. I even removed one 0 refresh power in that write up, "Aura of Influence".)
tldr; It's up to you and your players where you draw the line. And it's up to you, as the GM, which of your own lines you enforce in your group regardless of the players' desires.
