If I’m not mistaken this happened after the Azure SDK 1.3 update. Web.config transformation didn’t when running your website in the local Development Fabric/Compute Emulator. Running your website outside of Azure or publishing to Azure still executed the config trasformation.
To fix this, unload your Azure project, open the project file for edit and add the tag
<packagewebrole>true</packagewebrole>
as a child of the following element:
<Project ...>
<PropertyGroup>
...
<packagewebrole>true</packagewebrole>
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