Is the Power Scale circuit just converting the unwanted audio power into heat?
No. If you only need 3W of power then only 3W is produced; if you need 29W, then you get 29W. The simplest Power Scale circuits are soft regulators, and as such, they divide the voltage available from the raw power supply between the amplifier and itself. In that voltage sharing, there will be some waste heat. For Power Scale control settings between minimum (fully anti-clockwise) and about 12-o’clock, there will be waste heat from the Power Scale regulator. At settings between maximum (fully clockwise) and 12-o’clock, the regulator runs cool. Meanwhile, as audio power is reduced, waste power in the power tubes goes down in direct proportion, which increases their reliability.