The upper valve closes off water from exiting the heater. The lower valve diverts water from entering the heater, up the bypass pipe. As long as the upper valve is also closed, no water flows through the heater. It's actually an efficient/elegant setup. Just remember when winterizing to open both the heater drain valve/plug as well as the pressure relief valve to drain the heater.
When dewinterizing, be sure to flush the system before opening the heater valves to prevent antifreeze from getting into the heater. It's also a good idea to remove the heater drain plug and thoroughly flush the heater. We get lots of white residue (lime?) coming out when we do this.
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2013 V 3105
2016 F350 King Ranch CC 6.7 diesel dually
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