1) this is a webfaction questions :), for auto_start take a look at
http://forum.webfaction.com/viewtopic.php?id=2933

2) replace its content with nginx.conf


but I would recommend to use just uwsgi, it has a built in webserver

now I use that:

[web2py]
wget http://www.web2py.com/examples/static/web2py_src.zip
unzip web2py_src.zip
python2.7 web2py.py #seems needed before using it

[uwsgi]
wget http://projects.unbit.it/downloads/uwsgi-0.9.9.2.tar.gz
tar xvzf uwsgi-0.9.9.2.tar.gz
cd uwsgi-0.9.9.2
/home/your_name/bin/python2.7 uwsgiconfig.py --build
mv uwsgi /home/your_name/bin

then execute this command

uwsgi --http 127.0.0.1:your_app_port --pythonpath /home/your_name/web2py
--module wsgihandler -d /home/your_name/tmp/uwsgi.log -t 20 --async 16
--ugreen --limit-as 36 -r --no-orphans -M -p 1 --touch-reload
/home/your_name/tmp/uwsgireload.txt --reload-on-rss 50


to understand better the meaning of each parameter you can take  a look at
http://projects.unbit.it/uwsgi/wiki/Doc

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