Hi Dazo, glad you enjoyed the mod :)
Re Hard Mode, it's not really supposed to be possible to win it 'properly' (that is, no amphibs) as the Confederates. I calculated the starting NM so that if everything goes exactly as history, then it should fall to zero around the time Atlanta fell - by that point the CSA was written off by the Europeans and had lost all their good armies. (My preferred tactic is to spam a bunch of cavalry through the Shenandoah and just rampage through unoccupied Pennsylvania). 0% NM doesn't represent "surrender" so much as "we are definitely going to die very soon".
The NM values for the cities on the Ohio are correct - if Kentucky is Confederate, which was a reasonably possible thing in both 1861 and 1862, then those cities are only a short hop away from the new border. Losing a border city, while it would hurt, wouldn't necessarily be war-ending the way a CS capture of Philadelphia might be. IIRC Washington is 50%, because while that would hurt the cause a whole lot, instant-game-over because you get pushed back 2 tiles is pretty harsh (NY and Boston are another story though).
Deployment in captured territory can be argued either way - the Union certainly raised units out of officially Confederate states and I'm pretty sure the Confederates did the same, although on a smaller scale. It's also less 'occupied territory' and more 'the rebellion has been crushed' - from the Union's perspective Tennessee is not a different country. From a game perspective, perhaps it isn't the most conventional setup, but it has enough basis in reality that I have no problem with it.