Correct. FanFicFare as currently designed cannot nest TOC entries.
Looking at your examples, episodes and sections both appear on the same
page, and episodes are the links to the pages containing the story
text. And, as you said, not all stories have sections of episodes. So
episodes are the clear choice to use as FFF chapters.
I would concatenate the section and episode strings for each chapter by
default, but add a configurable setting to not prepend the section
strings. And maybe a third option to only prepend the section string to
the first episode in each section. Something like prepend_section with
values true, false, and firstepisodeonly?
You could try to include code to automatically detect when the author
already included the section in each episode title, but I don't see
anything like a convention on that. If you do, there should also be a
config setting for users to turn it off if they like.