A video would be most helpful.
A. Yes, this can happen. With ALT HOLD, there is heavy computations which occur and the copter may reduce power before increasing it. Once the copter is off the ground, it should stabilize in the air, though the copter will bounce up and down by around 50 cm. Lidarlite should cure this problem.
B. Drifting across the horizontal axis is solved by making changes to AHRS_TRIM_X and AHRS_TRIM_Y.
Please see my assembly tips thread on how to make changes to this.
A manual adjustment may require 10-20 test flights, each taking about 30-60s, while you observe the direction which the copter drifts and make alterations to the above params.
Also note, that you won't get a "locked" position. This may be achieved using PX4Flow, but again, read one of my threads about this device.
You can use POSHOLD mode, so the GPS will force the copter to hold a horizontal lock. But GPS is not accurate. Roughly you can expect to get a 4m squared area.
C. This is dangerous. So make sure your RC has Emergency Motor Stop enabled. Again, read my assembly tips thread to see how this is done.
If ever the copter goes out of control, you need to kill the motors. A copter without MOTOR KILL ability is a lethal weapon and should not be permitted, IMO. It's like driving a car without an emergency/secondary brake.
Videos of this behaviour will make it clear of what is happening.
I have tested the version of AC which comes on Escarlata and it is not reliable.
It could be that you are experiencing similar unreliability.
I have not yet seen any videos showing the Erle Copter using Escarlata and able to fly reliably, which is why I encourage people to post videos.
Solution: switch to an older version. To do this, check my thread. I have uploaded the version of AC, which I am using.
B) Stabilize mode: this mode gives direct control to the motors (there is some algorithmic motor monitoring, but for the most part it gives clean motor control). The copter should rise, once the motors are spinning fast enough. The increase in altitude should be constant and the copter should not come down unless you reduce throttle.
Again, you will need to show a video of this.
Make sure you have changed the parameter which sets up 50% throttle, to get a stable hover.
In Escarlata, look for:
MOT_HOVER_LEARN = 0
MOT_THST_HOVER = set this to a number which gives perfect altitude hold, in STAB flight mode, so that the hover happens at 50% throttle on your RC throttle stick.
If your copter is too powerful, you may need to alter the throttle curve on your RC. See my thread on how to do this.
Assembly thread: http://forum.erlerobotics.com/t/erle-copter-new-users-assembly-setup-tips/1317