I'm no electrician, but it seems odd to me that your wiring melted. Somethings not right about that. I'm going to ask Poconos to take a look at your post and see if he has any words of wisdom for you.

I do think you can go with a smaller pump, though. For a 16K pool, 1-1/2 hp is more than you need. I have a 13K AG pool and I have a 1/2hp full-rated inground pump and it is plenty big enough for my pool.