There's absolutely no reason they shouldn't have catered to a wide range of resolutions... or rather developers allowed for a wide range of native rendering resolutions, and not just that, but full detail options like with PC games. As it is, that was the case with previous generation consoles to a modest extent. (there was often performance improvements for running in low detail modes for games that did offer high res or added detail -like N64 games supporting high res or some PS2 or Xbox games that had higher rendering resolutions -I think some of those may have been false advertizing though and simple upscaled low res rendering)
Except there's absolutely NO game on the PS3 or 360 that's going to be upscaling from 480p

so ALL you games that you play in 480i ARE being scaled down to that resolution (and then interlaced and converted down to 15 kHz on top of that).
Most 360 games are 720p native with a few 1080p (be it 960x1080 or 1920x1080) and a lot more 1080p games on the PS3.
I'm not sure if any games actually support rendering in more than one resolution though, it could be that all games render in a native res and downscale (perhaps simply using larger text for lower res modes as I've yet to see any text that can't be read at 480i via composite no less -except on a crap TV with blurry composite).
The added heat/power consumed for simple scaling should be insignificant to the overall system.
Also, the only reason you'd even ever use scaling for an HDTV would be if text in 1080p is hard to read using the onboard scaling of a 720p set, having an older 720p or 1080i set without any scaling support (not sure if that's even an issue), or if you have a 1080p set that has crap scaling, so it would be preferable to use native upscaling.
That still doesn't change the fact that having the flexibility of true variable rendering/detail options (like PC games) would be totally awesome: be it being able to use 768p of "720p" HDTVs (only or the highest native resolution of various monitors), being able to select your own trade-offs of graphical settings, etc. (of course with defaults for anyone who doesn't care to mess with that)
I think the main problem with 720p HD sets is that, via HDMI, they fail to properly transmit their proper native resolution (at very least a problem when using PCs), though using VGA or component would solve that by bypassing the digital interface and corresponding identification. (VGA can have such identification too, but I don't think HDTVs tend to provide such -that's definitely the case with our TV, and it's VGA all the way for that reason)
I'm not sure if that's a problem with most 720p sets, or if it's more common on some LCDs than others or Plasma for that matter.
But, in addition to resolution there's tons of other rendering options that one could modify to their liking. (particularly trading detail for framerate or vice versa)
And again, my no means am I saying that SDTVs are anywhere near the best for playing PS3 or 360 games, but that it's still quite acceptable for most stuff.
It's more or less comparable to dropping down to 640x480 on modern PC games.

(though 480p on any decent PC monitor -including LCDs- is better than SDTV ouput) In fact, 640x480 on a newer game might still be acceptable if you have an older system and want a nice high framerate. (or do it just for fun to see what it looks like

) More likely you wouldn't drop below 1024x768 or maybe 800x600 though.