It should work with ms-files.php in use and you do need to make that swap the blogs.php and ms-files.php have similar code but blogs.php its going to be support going forward
You are using local avatars I wonder if it is this that is not working and the new ms-file.php file doesn't handle the way the avatar are stored
I am see avatar in the root of the test site which like you was upgraded from MU
Not sure how to help here
What you is the image on if set it back to ms-files does it change in the plug-in?
if not then it is the way that the file is fetched not this plug-in that where the problem lies
have you check with the local avatar plug-in that you are using to see if is has a problem?