I think it's wrong to assume "Level 1" is referring to the same Level 1 in every game. Sora might drop his spells and Commands every game, but he's clearly doing bigger and stronger things in each game. He temporarily inconveniences Jafar in KH1 at early-mid-game or so with back up support, he kills Jafar all-but-single-handedly in KH2 at only a few levels higher. He kills Ursula in KH1 at mid game with backup, he kills her almost off-handedly during a musical sequence in KH2, and he kills her at Level 1 in DDD (though she's not quite at her full power). And he learned Flowmotion first thing in DDD, which I doubt would have been the case for Sora fresh off the island in KH1.
Really, I think Square was making a mistake by providing a an explanation in the first place. Why does Sora not have his Fire spell? I don't know, and I find I also don't particularly care? If the games stopped bringing it up, I'd stop noticing entirely. Remember Final Fantasy 4, when Cecil was in charge of a world-conquering military force at Level 10, a level Rydia reaches within one dungeon? You probably never noticed. If it had never come up, we'd never have objected.
In the end Sora's definitely not really regressing to his former weak self. The game just says "Level 1" to mean something else entirely. When Sora starts off in KH3, I don't doubt he's going to be stronger than ever, even if it once again says "Level 1."