I had a different take then and it has kinda stood the test of time.
Lee's problem wasn't her skill, which is difficult to assail. Her problem was and is us, the viewers. As much as everyone bemoans typecasting we also openly celebrate it when we're not being so self conscious about it because our brains are wired for it.
Lynch brought a 50's cheesecake photo of a high school homecoming queen to life. She delivered meals on wheels, she tutored a mentally challenged young man, dated the high school football quarterback, the list goes on into the absurd really, but that's Lynch that's not her fault. He's hammering away. That was my only real problem with this setup. Like where the hell did she find enough hours in the day to play the Saint of Twin peaks, with all of this glorious detail and then go out, get coked up and run wild, date Bobby, date whoever else while all the while getting abused by Leland-Bob. Her character really is super human in that way. There's just not enough hours in the day for all that shit. Forget her diary, I want to see her goddamn day-planner.
I think Lee was fine. In fact I'll say that not only Lee but all the rest of the guys and gals cast in TP would never have broke nearly as big as they did without David and the weird, out of left field popular success of the show. Sheryl Lee is a fine actress that in another universe, in this case Lynch's own, would naturally be a movie star like he said. All of them, a fine looking bunch, young kids at the time with remarkable range.
The problem is, the real stars from the era this hearkens back to, say Grace Kelly, went so far and no further content wise. Go back further. What do you remember about Claudette Colbert in It Happened One Night? She was amazing and there was a motel scene with a blanket on a rope that must have driven audiences insane.
What's the difference between Sheryl Lee and Lauren Bacall. I mean pull them out of their settings and take a look. Content, basically. You can stretch and pull the imagination of the viewer, riff on subconscious themes like Thelonious Monk until you run out of film but once you explicitly show something bad, something real... the actress portraying the character doing something clearly over the line of unacceptability in a drug/sex/notsostandupgal-jeeperscreepers! way... you are flipping a switch somewhere in the viewers head that is usually avoided by conventional film-making logic for good reason.
Back in the day they had different tiers of actresses to portray different shades and levels of subject matter and they stayed very contained. Perhaps at the end of your career if you did a "difficult" film you would get an award for the fact that you were both physically and technically gifted and exceptional but probably not. The darker material stained a lot of actresses beyond the acceptable moral/ethical/sexual shades of acceptable convention.
Yeah Lee was young and exceptional but when you look at the ride her image took under Lynch there's no mystery why and how she became his and not ours in a public sense. We loved the old timey movie star thing but it's a thing for a reason and when you push conventional things like that past their limits they break.