Can you tell me the story of how Baba lit lamps with water?

Certainly. According to Chapter 5, Sai Baba had a great love for lighting lamps in the temple and mosque and would daily beg for oil from shopkeepers. One day, the grocers conspired to refuse him, calling his requests a nuisance. After being turned away, Baba returned to the mosque, took his tin pot which had a tiny bit of oil, added water to it, and drank it as an offering. He then filled the lamps with plain water, soaked the wicks, and miraculously lit them. The lamps, fueled only by water, burned all night, causing the astonished grocers to repent for their actions.