Uhh.. I did not realize that you did not have a water tile under that island, but had instead edited some basic TE tiles.
If you make the islands as objects (like the airbases are made) and plave them on water, then you can use the alpha for water areas and fades on the coast lines.
The objects I have had crossing the mile lines are bridges. This invisible case occurs easily with flat co-planar objects (like terrain tiles and airbase bases, etc.)