Yeah, I'm afraid from what your traceroutes are showing I'd have to agree with them on that one.
They might not, but they should be able to at least investigate and lobby for alter.net to check out their routers, on the basis that it is impacting their (your ISP's) customers connectivity. Unfortunately, this is all too typical of what you can expect in such situation from most ISP's.
It can't hurt to contact your ISP again; if enough people complain, with traceroutes to clearly indicate the problem, they may be inspired to tryo to get it fixed.
You can't, on a DreamHost shared server account. Installing a shoutcast server is specifically prohibited in the TOS.
I understand that the new DreamHost PS may allow that, and you can certianly do it on a dedicated server.