The difficulty spike: how would you address this situation?

I'm a little late to the idea party, however something I've wanted to do to that battle (after ramping up the difficulty) was add a couple of guest characters. You could add a spider (Narsh guard or Figaro guard) and lock their gear. Giving them a cover skill and a protect accessory without hurting the rest of the game. Or just a general tank low attack high defensive gear.

I think you should.  You said you wanted to expand the event space, so you can set up a few actor profiles on unused character slots (the ones with names before all the Kefkas), then load their data and names into one or more of the unavailable character slots: Strago, Relm, Umaro, Gogo, Setzer, Mog, and maybe Shadow, and then set those actors as 'recruited' with the event flags at the start of the battle.  Then the player can shuffle in Figaro ensigns and Narshe guards when they're forming their parties; it would work well with your other idea of endless attack waves.  That's basically all that the Moogle battle does at the start of the game; assign properties to as-of-yet unrecruited party members.  The Narshe esper defense even lists the event bits that would need to be used, as it disables those seven characters before the fight begins.  Just remember that you have to clean roster again after the fight, lest you wish to have these Narshe guards available for escort to Kohlingen.

I've been trying to fit everything inside of the standard ROM space, which makes such an action infeasible for me.  I could make room by hexing in PowerPanda's "Cyan Uneventful Dream", but I'm saving that space for plans in the next phase of my hack's development, plans you yourself inspired Catone (a scenario split in the World of Ruin post-raft and pre-airship ).