Based on the wording of Treaty with the Isles/South it seems like if an opponent attached Formal Petition to his House card he or she would still need 10 power to win the game, not 8. Am I correct?

Correct.

The specifics of it is that the -5 power introduced by the Treaty can never bring the power needed to win below 10. So if you are playing the Agenda and I put out Formal Petition, what technically happens is that I still get the -2 from Formal Petition, but the -5 from the Agenda effectively turns into -3 so as not to take the total I need to win below 10.

Thanks (let me double check), ktom.