Well, I'm not really good in technical stuff, but I had the impression that these values changed the game effects for me a bit. I have everything maxed in the option (shadows = high and texture=high). I'm not sure if an option for ultra textures exists, I do not have the option though.
The good thing is, these values changed a little with nearly no performance impact. Shadows are still a little pixelated, but not as bad as before. See here for shadows :
http://omnitech.hard-light.net/team/starman/pics/ScreenShot3.jpgand this is how the water is looking for me :
http://omnitech.hard-light.net/team/starman/pics/ScreenShot4.jpghttp://omnitech.hard-light.net/team/starman/pics/ScreenShot6.jpgAs for not playing on the PC, I must say I'm no console fan. I must admit, playing the game on the big TV is certainly better than on my desk with a 24' monitor, but in nearly all ported console games, the graphic is always superior on PC, and that's why I buy on PC. AND the second reason is indeed the modding capability.
Regarding that water problem you have, i also have that sometimes (very seldom). Usually under water the screen get's blurry, but sometimes, the game forget to render this. But see it this way, the game is out only 2 months, and is already the best of the ES Games. I can't wait to see how it will be improved by modders.
