S,
Thanks for the additional pics...
I agree with JamesW... It looks to be a heater bypass.
More of a partial bypass and not a complete bypass.
With the handle pointed to the left or right, the bypass would be off and all the water would go through the heater.
With the handle pointed at the ground, most of the water would bypass the heater but some water would still go through the heater.
Thanks,
Jim R.