*.local, 169.254/16
Should these be here?
Yes
What is 169.264/16 --- it's not a proper IP address... ?
It is a proper address range. 169.264.*.* (aka 169.264/16) are self assigned IP addresses. A system will use one of these addresses if the computer cannot find a DHCP server to assign it an address. 169.264.*.* are non-routing IP addresses, so they can only work on the local LAN.
The .local domain is for addressing systems on your local LAN. If you look at System Preferences -> Sharing -> Computer name, the text under the computer name will have text along the lines of
Computers on your local network can access your computer at:
yourComputerName.local
The "Bypass proxy settings for these Hosts & Domains:" basically programs that know how to use Proxies, that these addresses and domains should not be sent to the Proxy Server. For example in the Corporate setting, addresses to computers inside the Company should not be sent to the proxy server, as that would send connects to the outside world, and the computers inside the company are not accessible from the outside world, so you want to make sure those addresses do not get sent to the proxy server.
in the case of 169.264.*.* and *.local addresses, these are on your local LAN, and again, if you are sending things to a proxy server, you do not want to send these addresses to the proxy server, as these addresses are non-routable and thus not accessing from beyond your home router, which is why they are set by default in the "Bypass proxy settings for these Hosts & Domains:" field.
First of all, do you have Proxies set? Most normal people do NOT need a proxy. Proxies are generally used by Macs behind a "Corporate" Firewall that does not allow unrestricted access to the internet, and require employees to surf the web via a Proxy server. So if you do have Proxies set, that could be a problem all by itself.
If you DO NOT have any proxies set (no boxes checked in the "Select a protocol to configure" section, then the "Bypass proxy settings for these Hosts & Domains:" does not do anything.
By the way. You posted this in the Mavericks forum, but your signature says you are running Yosemite.