The outside switch turns the electric power on for the water heater.
The inside switch turns on the propane for the water heater.
They are completely independent of one another. If you have inside switch "On" and the outside switch "On" then you will be heating your water with both electric and gas. If you have the outside switch "On" and the inside switch "Off" then you are using only electric. If you have the outside switch "Off" and the inside switch "On" then you are using only propane.
You can use only gas, only electric, or both at the same time. The main thing is to remember to turn off the electric component before you drain the water heater. Running the electric heater element with no water in the tank will burn it out very quickly. I turn my outside switch "Off" when I unhook just so I don't forget to have it off when empty.
