This decision of not giving tickets to current corporators is indeed historic. If it had happened in my city, all current corporators would have migrated to another party (although they just did it in last month's election, and most of them joined from Congress/NCP/MNS to BJP )
LG being the representative of the President definitely should have a say in the matter. He is the one who invites the party to form a government. He is also the one who can dismiss the government. I am guessing EC rejected the demand previously and LG was requested to consider the demand as well and even he has rejected it now. Of course, one would need to read the rules and regulations to see what exact powers do LG and Governors have in election matter.
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