"The two flue's connect but it's a step up in pipe diameter through the chiminey. I haven't had the heat run yet, other than at installation. Can I check for up flow when the heat kicks on and the hot water heater is heating? How, hold a lighter and look to make sure the flame is pulled into the flues? Sprinkle some baby poweder nearby and see if it travels up the flue? HOld a lite cig there and watch the smoke?"
Sorry for the delay in responding, I have been extremely busy. Glad to here that the pipe steps up in size. I use a combustible gas detector to check for flue and chimney leaks, you can use the cigarette smoke method but if you have a gap (the third red circle from the bottom on your picture that I reposted looked like it may have a gap, I forgot to mention that) or leak up the line you may still have a carbon monoxide leak, a combustible gas detector is probably best. Sometimes the gas company will check it for free or a small fee. I would at the very least make sure you (and everyone else reading this) have a Carbon Monoxide detector in your home.
"The blow off valve is copper pipe, 3/4" and is piped to outside the house, and currently dripping. I have installed and replaced many hot water heaters and plan to change out the blow off valve."
This could be a code and safety issue, depending on how far below grade your basement is (if it's even below grade), and where and how high above grade the drain is. Another problem is running flexible copper pipe through a wall to the outside where it may be damaged, crushed or punctured. The pipe size should be equal to or greater than the valve discharge outlet, if it's 3/4" then 3/4" drain is fine. Check you local codes to see what the requirements are. You really should replace the faulty (dripping) valve. If the dripping continues with the new valve take a look here: http://www.amtrol.com/thermxtrol.htm
"The gas line is copper tube, the gas company man didn't say anything was wrong with that. What is wrong with that?"
In many areas copper pipe is against code for gas, I think but I am not sure that flexible copper is not allowed at all for gas. I don't know where you are located so it might be OK in your area. There is a special type of copper (tin lined) for use with gas, regular copper can corrode from element found in natural gas. I have pulled copper lines that have been in a house with no leaks for many years, so it wouldn't be my biggest concern. . Check you local codes to see what the requirements are. I'm also a little more picky than most, I would have replaced the copper pipe and the valve when I changed out the water heater, but that's just me.