So I am little confused. Are you trying to only specify a the externalStyleSheets and not specify the rtePlugins/styles element in your dialog. The two elements server different purposes. The externalStyleSheets element allows you to specify a CSS file that gets applied to the the rich text editor so that text appears in the editor styled in the same way it will be styled when displayed on the page, it does not drive the contents of the style drop down. The style drop down is driven by the rtePlugins/styles element. In an ideal world you would specify both values so that not only do the styles show up in the drop down, but the text in the editor appears properly styled.
You also have to include the styles in from your external style sheet in you page's stylesheet so that the formating is properly displayed when the page renders.
I think I understand. Sorry, I thought the text component would look at my specified external style sheet and then populate the styles drop down with the styles found in that css file rather than me having to manually specify them. I thought CQ was just very clever.
I have created the the rtePlugins/styles node but all it containts is features = * property
So I have to specify an external style sheet and STILL include the styles manually to appear in the drop down.