Err, sorry, made a mistake there. A height of One is the closest you can come to covering the entire level. A Water Level event with Height 0 will set the top of the water to the tile you're on.
The bottom of the water area will always be at the bottom of the level. You can't have walls to keep water out of something or other and stuff like that. It goes from its height to the bottom of the level, and doesn't stop for anything inbetween.