CEL won't clear/ no code found 1997 960 station wagon

[volvo960sw]

Hello everyone,
I have a few issues with my Volvo; It has almost 198K and ran fine until last week with an orange arrow and W and S by the shifter flashing plus CEL on all at the same time. Code P0705 so I purchased a transmission range sensor from Ipd+ and installed it, starting on Park but not on Neutral. I noticed it accelerates better than before (it lacked power when going uphill before the fix). CEL didn't go away and the scanner indicated no code found now. Tried plus+ and neg- cables trick with no luck the CEL is still on. It's been driven about 165 miles after the orange arrow and W & S light are gone. I need to clear the CEL so I can have a smog inspection soon. Thanks for any help, or suggestions.

Next, there is the part that appears to be in bad shape with yellow #1 in the attached photo but I don't know what that is and whether it must be replaced. Can someone help identify it and explain its function? Also part with yellow# 2 is the fuel regulator, right? Thanks a lot.

Happy New Year to all.