There's more than a few inconsistencies between this episode and the established story from the films. SPOILERS follow...
In A Nightmare on Elm Street, it was stated that Freddy was released because "somebody forgot to sign the search warrant in the right place." Here he was released because the arresting officer didn't read him his Miranda rights.
Lt. Blocker is never mentioned in the films, and the Thompsons from the first movie, who were part of the mob, aren't mentioned here.
Marge Thompson said of Krueger's death that the parents left a trail of gasoline through the boiler room and out the door, lit a match and watched it burn. Here, however, Lt. Blocker douses Krueger himself with gas and lights the match.
In Freddy's Dead: The Final Nightmare, the mob is seen throwing a malatov cocktail into Krueger's lair, which is also inconsistent with his death here. In that film, he's merely surrounded by flames when the dream demons arrive to offer him immortality, he's not actually on fire.
In the first film, Marge Thompson revealed that she took Freddy's glove as a souvenir after they murdered him. No reference is made to anyone doing this here.
In this episode, it's officer Gene Stratton who hides Krueger's remains, but in A Nightmare on Elm Street 3: Dream Warriors, Donald Thompson was revealed to be the only one who knew where Krueger's corpse was hidden. There's been some speculation as to whether or not Stratton was supposed to be Thompson, but Stratton wasn't present when Krueger was murdered, as Thompson was alluded to have been.
Additionally, the time period No More Mr. Nice Guy takes place in throws the rest of the Elm Street timeline completely askew. In A Nightmare on Elm Street, Nancy watched Evil Dead on her TV and has a poster of the band The Police on her wall, which establishes the film taking place in 1983/1984. Since Nancy and her friends were unaware of Freddy (and a deleted scene reveals the kids who were being terrorized in the first ANOES each had siblings who were murdered by Krueger), Freddy's death would have been in the late '60s or early '70s. No More Mr. Nice Guy is supposed to be a prequel to the first film, however, the look is very late '80s and (in addition to the vehicles) Lt. Blocker winds up wearing a Walkman style of headphones that weren't around in the '60s and '70s. The timeline is thrown into further disarray by the sequel to this episode, Sister's Keeper, where a poster for Madonna's "True Blue" adorns the wall of the Blocker girls' bedroom. "True Blue" was released in 1986, three years after Evil Dead. That sets the events of these episodes after the first film.
Throughout the episode people confusingly refer to the chief of police, as Chief, Lieutenant, and Sheriff.
Lt. Blocker: You're dead!
Freddy Krueger: Big deal!
Freddy Krueger: (to Blocker, restrained in the dentist's chair) Oh, those teeth! Tsk, tsk, tsk! I'm afraid they'll ALL have to go! You tell Freddy when it doesn't hurt!
Freddy Krueger: (voiceover for postcard) I'm burning in Hell. Wish you were here.