How to get a notification when user is blocked following flood
Yes, Flood is part of core (it lives in includes/common.inc, and because Rules is a contrib module, there is no set way to integrate cleanly in Drupal 7. 

The one thing you might be able to do is to do a form_alter() on functions like user_login_final_validate($form, &amp;$form_state), since if a flood event has been triggered they will include a form value such as $form_state['flood_control_triggered'] which, when it is not empty, will indicate that a login attempt has been blocked. Then of course your custom form_alter implementation can call any Rules events it likes.

This is totally untested so I can't verify that it would work, but for now there doesn't seem to be an easy or clean way to do this in D7.