I'm with you regarding Fredo, TB. He was a threat. He was not harmless. The depth of his anger and resentment in the boathouse scene proved that.
As for Pacino's points, while he obviously "knew" Michael better than anyone besides FFC, I disagree with his thoughts about making Kay the focus of III. The only reason we care about Kay is how she relates to Michael. I do, agree, however, that the loss of Tom Hagen was a huge one.