I can understand your priorities. There are many brilliant things in this scen that comes from these priorities. Just a few concerned questions :
Why can't you have uboats crossing the atlantic? They can barely cross the channel as it is! (at least initially). I don't think its reasonable to expect that a player can/will research all the uboat/naval techs, when he has to choose between those and the panzers. The uboats will be second any day. If he, on the other hand, had a powerful weapon at his disposal in the subs, equal in power to the panzers, there'd be a real dilemma. But subs have always been too weak in Civ2 to be worthwhile, IMO. Your torpedo concept beefs them up pretty much. But they DO need higher movement rates. Especially if the sub war in the atlantic should be anything else than pure gambling.
If the german uboat effort took place only in the later phases of the war, why do the germans start with 3 subs in the atlantic off the american coast?
I think naval warfare can easily be beefed up just a tad more, to make it more interesting, more worthwhile and more dangerous. It'd be more important for the germans to defend all their coastlines, as it was historically, because they didn't know from where the invasion would come. They even fortified all of the coastlines of jutland and norway, in the fear of a british naval invasion. And the allies would feel less safe from knowing that subs could strike at a distance.
It is very difficult to let engineers build cities from the AI perspective. What would you call them and how could cities be built in a few years? Who would have the ability to rebuild cities in the midst of full-fledged war.
The AI won't build many cities if they can't find good spots to place them. So if the map is covered with cities, very few cities will be founded by the AI. And rebuilding cities is not that unreasonable. Afterall, there are civilians living there, who needs shelter, food, jobs etc. You're probably right about the "mobile" nature of WWII, but why not leave it open to player priorities? Afterall it is a lesson learned in the wake of WWII. Bunkers and fortified points still played a part in the minds of strategists and generals. An invasion by sea was/is a very difficult operation, because of the fortified positions on the shore. It wasn't done by sending in the bombers.