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1) There is a blue wire with a conector that looks a bit like a spark plug boot that goes on to the top of the fuel filer assembly. It is the one that goes falt on the top. The wire is broken out of the boot. What does this wire do? I would guess maybe it is the water in fuel sensor?
2) It is also leaking fuel around the little spade terminal that goes under the above boot. Can I permanently attach a wire to the terminal and use a sealer around it? or do I have to replace the whole casting?
The flat square connector is the fuel heater, if the fuel is coming out around the terminal then you will have to get a new heater. If the fuel was around the circumference there is a oring that seals the heater in the head. If you want to try it some have dremelled around the terminal and sealed with epoxy after much cleaning. There is only 4-6psi at that point. The other option is a new heater $125+. The heater is removed by removing the large center nut under the filter head where the filter is screwed onto. Check out filter pics here... http://www.intellidog.com/dieselmann/idi2.htm
Just skin back the connector a bit and solder the wire and heat shrink the joint.
The water in fuel sensor is where water would be on the base of the filter.