If I had that one, I'd probably start with a dremel stone, then the Cratex wheel and smooth them out. If the springs are really weak, not much you can do about that except replacement. However, something like Deoxit-D5 on the axles and hinge of the roller assembly will reduce any resistance and potentially help with the sparking.
I'm guessing Chuck has the right answer, find an original pickup assembly.
I have the PWC Picatinny Arsenal TMCC version and as you can see, my rollers look clean. I've also recently cleaned the armature and lubed the engine. However, this still has visible sparks running on a pure sine wave transformer, it's the nature of the beast. I doubt they're nearly as bad as what yours produces. Note that the rollers on mine are made from what looks like sintered brass, these are what Lionel supplied on these locomotives.
