I am using XMLSpy. Any idea why it's writing <p/> instead of <p></p>

In XML <p></p> and <p/> are equivalent. XML tools are required to do
exactly the same for either form.
Your problem is probably that you look at the result in a browser
without telling it that you are using XHTML. Browsers expect HTML
and will ignore the <p/> form, which in turn causes them to assume
the cells don't have content and suppress cell boundaries.

The easiest fix is probably to tell the XSLT processor to generate
HTML instead of XML by using
  <xsl:output method="html"/>
immediately at the beginning of the style sheet. Look up details
in the spec:
  http://www.w3.org/TR/xslt#output