Ok, this might be an extremely late reply, but this is for anyone that needs help.
A1 - You can use mp3 files for this mod.
A2 - No it is not normal, they should be in the 'ambience_music' folder
A3 - You use the filename in the config.
A4 - I am not sure how to answer this question, but I can still help. The way I have made my own song packs is that I would download an existing one and open it. When you come across the titles of the songs, they will have names such as 'ocean', 'mountain', 'boss battle'. These names are meant to be the biome or situation in which the song plays.
The easy way to get your music to play is to drag all the tracks you want into the the 'music' folder within the 'ambience_music' folder and rename your tracks exactly according to the biome that is represented by the music that was already in that folder. For example, in the Legend of Zelda music pack, there will be a track named ' ocean', simply rename whichever track you want to play when you are in the ocean to 'ocean'. Some of you may encounter the problem that you can't have duplicate file names. What I do in this situation is that I rename the existing track (not the music you want to play, the music already in the pack) to Z(name), for example, the track 'ocean' should be renamed to 'Zocean' so that it goes to the bottom of the list, then rename the song you want to represent the ocean biome to 'ocean'. Once you have done that to all the tracks, delete the music that was previously there (all the tracks with Z behind it and you should be good to go!
Please reply with 'YT' if you need a youtube video with more clarification, incase this was hard to understand.