harness fire...

I believe the grey might be your oil sender.

It is not very difficult to tear down those alternators, you might do that and inspect it.

You have a shop manual/ wiring diagrams?

You should be able to unhook the alternator and 'safe off' the wiring and run the car just on the battery for testing.

Sparks in the alternator--should not be. Now, it could be either way......if there is some short in the system, the alternator could be sparking internally because it burned up something in there, diode, winding, etc trying to "keep up" with the short, or it could be the other way around......the alternator could have a serious problem and could BE the short to start with.