What should I change in .htaccess to have dashes in the url instead of entities?

Well, that would require a lot more than just .htacess. Zenphoto uses the URL to find a filename, so if it has dashes instead of entities, it won't be able to find the file with the real characters.

You'd need to modify zenphoto's core code. I've considered adding this, so it will probably become a feature later on.

Thanks. I really look forward for it.