If you are right then how does that affect the flow or tank levels?
If lifting to a reservoir of sufficient capacity, you can run at fixed speed / constant flow out of tank T2.
Some systems though have the need for varying flow to match demand, to avoid having to stop / start the plant. UV reactors are normally limited to around 4 starts a day if you want to get the rated life out of the lamps. Sand filters do also not like lots of start cycles, and you waste water if there's a rinse to waste cycle until the filter beds down. So the normal approach is "try and keep everything running as long as possible", which may mean varying the flow rate through the plant to avoid reaching top water level in the final reservoir.
That would only need to happen gradually though... a few gpm rate change over a half hour.
I almost exclusively do controls for water and wastewater systems and by far the most reliable approach I've found is providing the operator with a fixed flow setpoint, or a range that the control system can slowly adjust between, for either the start or finish of the plant.
Each tank in the process then becomes a point where you can de-couple from the previous process, and use the capacitance in the tank (as the good Dr calls it) to deal with any short term flow changes from a wash cycle, automated sampler, etc. The level in the tank normally doesn't matter, within reason... don't overflow it, and don't airlock the pumps.
The Well Pumps in the OPs case are also on VSD, so can be varied. Thinking about it, this could also be part of the problem... if the well pumps are speed controlled to maintain a tank level, but so is Pump 1, they end up influencing each other if the same level setpoint is used for both loops as even a slight deviation from setpoint will cause one loop to increase and one to decrease.
Having the well pumps aiming for a higher tank level setpoint and outflow pump 1 aiming for a lower setpoint will maximize the flow rate through the plant (assuming high enough gain on P only controller, or suitable integral gain).
Plant operators don't give a toss about the tank levels within the plant, just the one at the end. They need to produce a certain amount of water to meet demand, which is best defined by a rate or a volume. This is why i like giving the flow setpoint as the main control.