MSDN article here ( http://msdn.microsoft.com/en-us/library/8dcbc50t.aspx) states that "For this link to return information, a Web server, such as Internet Information Services (IIS), must be running on the local computer."
A poster in another forum ( http://forums.asp.net/t/1224187.aspx) is having trouble with accessing local web services and the error message reads
Active Directory Services cannot find
the web server. A possible cause for
this is an incompatibility between
versions of Internet Information
Server (IIS) on the client and the
server. Another possible cause is that
IIS is not installed on the local
machine, or the user identity under
which you are running may not have
permissions to view websites on this
machine. To view websites on this
machine, make sure that you run Visual
Studio as administrator. On Windows
Vista computers with IIS installed,
make sure that IIS Metabase and IIS 6
configuration compatibility feature is
enabled."
This makes me think that the local web services are discovered by querying the IIS metabase from the local computer. Most probably, there is some managed COM API that allows one to do this.
EDIT: Regarding your experiment with Fiddler - it does not catch calls made to "localhost" (see http://www.fiddler2.com/fiddler/help/hookup.asp#Q-LocalTraffic), so, even if Visual Studio made such calls, these would not be displayed.