I have to say though, making a blank esm is the way to go John.Moonsugar explained exactly how it should be done, and how i would do it, and its pretty easy. I wouldnt bother with opening up the Morrowind.esm in the CS and deleting everything then saving as a plugin, will cause you more problems than anything.
Plus, you can edit the chargen scripts so you can start the game in whatever cell you like. I managed to do it fine, without editing the ini
Also, by default, in any form of plugin, the ground is below the water. The water level is at 0 on the z axis, and the terrain is at -2048 on the z axis. Not sure how you came to think that the land is ever above the water by default, unless ive misunderstood something