[Rwillia4]

drilling holes would be similar to installing the by-pass (read: install the by-pass).

Where is the sensor located? I assume it is on the intake just before the t-stat. Is it adapter installed "deep" enough in the hole to not allow any small bubbles to collect right at the sensor? Does the adapter have a flat bottom? this would be to minimize any bubbles collecting at the sensor?

Turning on the heater would reduce the temp spike quicker only if the t-stat is working correctly. So I don't think that is the problem.

The fact that it spikes quickly then takes time to reduce means to me there is poor flow around the temp sensor or the sensor is not in the water flow, maybe a bubble.

Some one wrote about a lose impeller on the water pump, that is something to keep in mind, we have seen that before on new and old water pumps and has similar symtoms.