You might not realise this, but when your headlight earth (or any earth for that matter) is not grounded the voltage on the cable will be pulled up to 12V. Its basic ohms law, is there is no current flow through the headlight globe and wire, then there is no voltage drop, so you get 12V on the ungrounded earth wire.
So the fact that it has 12V on it when it isn't earthed doesn't mean its not an earth wire. And the fact that nothing works when it isn't earthed suggests that it probably is.
And if its got headlight current flowing through it, given the crappy undersized cables usually used in the Sierras, I wouldn't be surprised if it doe warm up a bit...
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