The answer is that heat is transferred by conduction through steps 1, 2, and 3. Conduction is the transfer of heat through a substance that is a different temperature without movement of the material. The heat transfers to the bottom of the pot in step one, the heat from the bottom of the pot to the base water in step two and the heat from the water in step 2 rises to the top of the water in step three. All steps include conduction.