Xml paring error using utf8

Question

I believe I have set up my environment properly to handle utf-8 characters. on my Windows 7 platform.  However for this version of the database, it seems not to be working.
To get my utl-8 extended Latin-1 characters I used a utf-8 enabled editor which provides a pick list of special characters to select.
This is my database version:
BANNER
Oracle Database 11g Enterprise Edition Release 11.2.0.3.0 - 64bit Production
PL/SQL Release 11.2.0.3.0 - Production
CORE    11.2.0.3.0      Production
TNS for 64-bit Windows: Version 11.2.0.3.0 - Production
NLSRTL Version 11.2.0.3.0 - Production
5 rows selected.
I use Sqlplus that is installed with the database and I set up the client (used both cmd and powershell) to run sqlplus using utf-8.
C:\Oracle\product>echo %NLS_LANG%
AMERICAN_AMERICA.AL32UTF8
C:\Oracle\product>sqlplus xmldemo/******
SQL*Plus: Release 11.2.0.3.0 Production on Tue Aug 6 23:39:12 2013
Copyright (c) 1982, 2011, Oracle.  All rights reserved.
Connected to:
Oracle Database 11g Enterprise Edition Release 11.2.0.3.0 - 64bit Production
With the Partitioning, OLAP, Data Mining and Real Application Testing options
CRAIG01> set define off
CRAIG01> set long 20000
CRAIG01>
CRAIG01> SELECT XMLTYPE('<?xml version="1.0" encoding="UTF-8"?>
  2  <contact id="1">
  3    <category>customer</category>
  4    <first_name>Johñ</first_name>
  5    <last_name>Pèrez</last_name>
  6  </contact>') as result
  7  FROM Dual
  8  /
ERROR:
ORA-31011: XML parsing failed
ORA-19202: Error occurred in XML processing
LPX-00217: invalid character 164 (U+00A4)
Error at line 4
ORA-06512: at "SYS.XMLTYPE", line 310
ORA-06512: at line 1
no rows selected
However, if I take out the special characters, the xml parses properly and returns it in a utf8 encoding.
CRAIG01> SELECT XMLTYPE('<?xml version="1.0" encoding="UTF-8"?>
  2  <contact id="1">
  3    <category>customer</category>
  4    <first_name>John</first_name>
  5    <last_name>Perez</last_name>
  6  </contact>') as result
  7  FROM Dual
  8  /
RESULT
<?xml version="1.0" encoding="UTF-8"?>
<contact id="1">
  <category>customer</category>
  <first_name>John</first_name>
  <last_name>Perez</last_name>
</contact>
I have set the NLS_Lang in both my test cases (Dos and powershell v3) and the database itself is in utf-8.  I swear this used to work, it this a bug?
CRAIG01> SELECT SYS_Context('UserEnv', 'Language') as Lan from Dual;
LAN
AMERICAN_AMERICA.AL32UTF8
1 row selected.

Answer 1

I have set the NLS_Lang in both my test cases (Dos and powershell v3) and the database itself is in utf-8.
You mean the database character set, right?
Like this :
SQL> select value
  2  from nls_database_parameters
  3  where parameter = 'NLS_CHARACTERSET';
VALUE
AL32UTF8