You can't control what directory a Steam gets installed to. They are always in C:\Program Files (x86)\Steam\SteamApps\Common for non-Valve games. For Vista, you need to turn off UAC, or run the CS as an Administrator so it can save to that folder.
I have the discs for Morrowind and Oblivion, but bought the huge Bethesda/ID pack on Steam a while back (every game they had ever released to date, something like 70 games for $70) and that got me Morrowind and Oblivion in Steam. I'm using them for my latest re-installs and mods work just fine in them. For instance, I just install mods to:
C:\Program Files (x86)\Steam\SteamApps\Common\Morrowind\Data Files\
Actually, you can control it to some extent.
You can change what directory Steam is installed. https://support.steampowered.com/kb_article.php?ref=7418-YUBN-8129
You can also move the install directory of a game wherever you want, provided you create a directory junction where steam wants to find the install path. http://forums.steampowered.com/forums/showthread.php?t=1138731
-- Bleh ,noticed most of this already covered, will still post it though since the link to the junction guide may be useful to some.