They could never release an "update"-ed version of this game other than the PC re-release that came out in 2012. I've said this before, but the original backgrounds are - at an absolute maximum - 640*480 in resolution. The area you actually see on the screen is even smaller than this (in general, 320*240). That's the reason they're so pixellated.
The reason this wasn't a problem on large screens back in the day was firstly because computer monitors were basically max 1024*768 at the time so pixellation was less visible, and also it was built for playstation before LCD's or flat-panel TV's existed. The image in old TV's isn't "rendered" the way they are now, it's projected from a big tube.
tl;dr, they'd have to completely redraw the backgrounds if it was an "update" to this version, and they're not going to bother with that when there's so much more required to modernise the game. There is no analogue control in FF7. This is something I don't think about until I go back to it and it feels terribly awkward now. Even FF8 has it.
Same situation with the FMV's as the backgrounds. The re-release uses the original 640*480 versions with a filter on top to make them look a bit smoother. tbh, other than the mods fans have created there isn't anything they could do to update the game as it is. It needs a full remake if they're actually thinking about HD-ifying it.