By "battle enabled" he's referring to water surfaces which function using the elemental mechanics in the game, as opposed to purely cosmetic water such as rivers and oceans that wouldn't, for example, conduct electricity, create steam clouds, etc. It's how you paint functional poison, puddles, ice, etc.
Down the side of the AI tool there's a drop-down menu. It will default to 'Allow', then you can choose 'block' (both of these simply paint tiles as valid/invalid for walking on), then the drop-down list continues into 'water', 'fire', lava, ice, electrified, whatever. Select surface type and paint on the level as you would any other thing.
