"8 b. Substitution on a Final Approach Segment. Substitution for the NAVAID (for example, a VOR or NDB) providing lateral guidance for the final approach segment."
That prohibits substitution of the localizer, not the DME.
Please provide a reference for context definition of the term "lateral guidance" in par. 8.b, as well as "lateral navigation" in 8.c.
To me, in context, "lateral" means in the XY plane, as opposed to vertical (Z axis). RNAV includes lateral and vertical guidance/navigation (LNAV and VNAV), and LNAV or lateral guidance/navigation includes azimuth and distance.
I have trouble resolving that, in context, "lateral" means side-to-side or Y axis (or LOC, as you noted) movement, as opposed to longitudinal (or DME to a straight-ahead NAVAID) guidance. After all, DME/DME or GPS or WAAS updating requirements of par. 11 provide provide primarily "lateral" (XY plane), as opposed to vertical, updating.