Brett,
If you can PM me your E Mail address, I will send you a copy of an article published in Microsoft Word format (.doc) that may be of some help in explaining the operation of the pressure reference line (The red line in Fig 2 of the Document).
Basically, the purpose of the line is to ensure that the regulated delivery pressure from the fuel pump rises as the crankcase pressure rises and vice versa.
It is fairly normal for the line to contain a mixture of vapour and liquid. However any small head of liquid is likely to have a negligible effect on the reference pressure that is transmitted to the spring side of the diaphragm.
Hope this helps
Regards
Bob
PS:
Would have attached a copy of the document to this post but it would appear that RCU does not support Mircosoft Word attachments. I think that a copy of the article, "A Guide to the Operation of YS Fuel Control Systems" may still be available under "Articles" on the Home Page of the GBRCAA Web Site
http://www.gbrcaa.org/