Thank you again. I did a little experiment and tried to block skimmer side flow using the thing and ran the pump at 3000rpm. Then to my surprise I actually noticed water flowing into the skimmer pipe. I examined the plastic thing (what is it called?) after turning off the pump and found that the flap that I initially closed the hole was actually moved. I guess it does that when the pump is running really fast and main drain only can't provide enough flow? So it looks like when I primed the pump, I actually opened both the skimmer and the main drain.

So assuming that no air is sucked into the skimmer, what are my options now? Try to run the pump at full speed regularly? Replace the o-ring? Add lube to the pump lid area?

Would appreciate any help. This issue is really bugging me now.