Those valve setting are correct to use city water, and yes, that will also allow the HWH to fill.
To fill the FW tank you switch the bottom valve to fill. With water in the FW tank when you turn on the pump it will (should) fill your HWH also.
If you try to run the pump with the bottom valve in the FILL position, as I recall it will run and run and run and nothing will happen. Ask me how I know this. After you fill the FW tank you need to remember to switch the valve back to Normal Flow.
Also, I'd look behind that panel (access from the basement) and see if you have a water heater bypass back there. On the newer models there is a valve in the docking center, along with the other two in your photo.
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2014 Raptor RP300MP w/ Rear Patio Party Deck, Folding Side Ladder, 6 Point Level Up, Carlisle Radial Trail HDs
2004 2500HD D/A CC SB - TTT Mirrors, Prodigy BC, 18K Pullrite Superglide, NEW Fuel Injectors 11/2015 (ouch)