I crushed the level above normal. Already at that point the AI is cheating some. I'm sure there is some level that will give a challenge, but only after the AI is getting significant cheating bonuses. At normal it is already using its full bag of tricks. I seem to recall one of the big selling points of GCII was that the AI put up a good fight without cheating. I guess I have to just accept that the AI in GCIII will not be able to play better than me any time soon, that the game is just too complex for it, and it will only be able to beat me with cheats for now.
The biggest issue with the AI right now is morale. It is not managing morale well. This accounts for their super slow expansion in some cases. I made a mod that gives the AI a flat +4 morale boost on challenging, and gameplay changed completely.
Normally I am running away with the game by 150 turns.
First big change. The AI is not sending constructors halfway across the galaxy to claim resources, why? It's actually building colonizers and grabbing territory. From here it snowballs.
I ended up in my last game only getting 7 planets, which was about average for all the nearby AI's, I was on the low side of average.
I then ended up at war from 4 directions by turn 70~ from the Krynn, the Meklar (MOO race of cybors, think Yor), the Yor and another MOO inspired custom race. I held off the Krynn, smashed them back and probably could have pressed them even harder, but the Meklar started making moves, so I peaced out with the Krynn and sent my fleets north. I pushed the Meklar back but couldn't get peace. Then the Yor hit through the backdoor. Before I could get any react down to where the Yor were hitting, I lost 3 starbases and 2 planets, one of which was my second primary production hub. Not to mention they were running fleets much stronger than I could.
That is from a boost of 4 morale.