This was not quite my scenario but here is what fixed for me....

My AuthorizationService.svc was in <MyApp>.Web and the webconfig file for that app had Forms Based Authentication....

Changed it to:

For me the lesson was that i should have tried to navigate to the service on the local machine like this:

http://localhost:1452/AuthorizationService.svc  because I once I did, I got the access denied message and understood what was wrong.

I needed to add a method to the webservice, once i updated it, I returned to forms based auth.