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When they become available the AI builds lots and lots of them. In battle, the AI destroyers have no problem attacking and torpedoing my best ships. My DDs just mill about. It's obvious to me that I don't know what settings and orders to use so they will attack and try to torpedo enemy ships.
Any help would be greatly appreciated.

I have found this as well. At least the early 300 and 400 ton Destroyers.

Oddly, however, when it is a destroyer squadron vs another destroyer squadron, my destroyers will launch torpedoes.

I'm playing Italy, and I am up to 1920. My doctrine is gunnery and torpedoes. So in theory they should engage? I have noticed as the technology progresses, they become a bit more aggresive. Maybe your opponent is more advanced?

There is a "flotilla attack" button that will let the supporting DDs off the leash. Once you select this they'll drive at the bad guys closest / biggest ships.
Note that this will usually spook enemy BBs into an evasive mode and can buy you time to escape if you're outgunned.
Early DDs often have issues launching torpedos. Seems to get better the more tubes you have, though even "mock" runs can cause an enemy reaction.
You can see if this order is "active" with a "black flag" icon on the left side of the battle screen.

You may not know that there is a button you can use to order your destroyers to execute a flotilla attack. It is not readily apparent, but the order can be accessed in two ways.

In the OB tab, left click on the Main Force text to select it and then right click on the Main Force text again to bring up the context menu. Select "Status" from the menu. This will bring up the "Force orders" screen, which allows you to issue a few fleet-wide orders. Click on the "Flotilla attack" button to order your destroyers to attack the enemy force.

You will also find a "Flotilla attack" button on the Status screen of each flag division - the Main Force, the Scout Force and the Carrier Force when these are present. This is located on the far right in the row of command icons.

After you have ordered a flotilla attack a small black flag will appear on the left side of the battle map. If you right-click on this icon, you will be offered the chance to cancel the flotilla attack. Doing so will eventually bring your destroyer divisions back to their normal positions in the battle line, though it may take some time if they have been heavily engaged.

Don't expect miracles from flotilla attacks. If your destroyers are few or poorly positioned relative to the enemy force the effect of ordering a flotilla attack can be barely noticeable, but if your force is in an advantageous position relative to the enemy force, and you have sufficient destroyer assets available, a flotilla attack can be quite effective. To get the most out of a flotilla attack your destroyers should be positioned forward of the enemy line so they can quickly close the distance while under attack. These conditions seldom arise except in relatively large fleet battles. I'll also note that a flotilla attack is a weapon most usefully deployed when playing at admiral level. At rear admiral or captain level it's often more effective to just take manual control of your destroyer divisions and order them individually into the attack.

If you specialize in torpedo, the best combo is doctrine training Torpedo + Night Fighting, as the night allow you to get closer without being noticed and shoot at.

Torpedoes are far more dangerous at night.

Destroyers will abort their torpedo run if too much people shoot at them even if they are not hit.

Thanks for the great advice. Just what I was looking for.