cmotion,
No, the phone won't constantly crank at the maximum speed unless you have performance mode set (I'm pretty sure). Your on-demand setting will allow the CPU to scale up to the maximum clock speed you've set depending on the demand placed on the system. Lower demand, lower clock speed required.
Any settings that you use that are below 528MHz would be underclocking since 528 is the base clock rate of this phone's CPU. Underclocking will save on battery life, so, well though-out setCPU profiles can make a world of difference in the rate of battery consumption. Your mileage, of course, will vary depending on your usage.
It took a couple of weeks before I realized that Ivan's Eris Official 1.0 came overclock at 710MHz
o). It was suggested (by CaddyMan, I believe) that I run System Panel to verify what was going on.
This was actually pretty enlightening since I could watch what speed the phone was currently running at (or at least as recently as System Panel was able to sample the clock speeds). Sure enough, this ROM was already overclocked and I was none the wiser (and haven't really deviated from 710MHz anyway).
Anyway, by just having System Panel running and by changing what was (or was not) running in the background, I could watch the load on the CPU and what clock speed it was cranking at. When I knew that something I launched was still doing stuff, sure enough, the clock speed was at its max. When there was not much going on (i.e., idling), you would be able to see/watch the clock speed drop to whatever you had your min. speed set to in setCPU. You can't, of course, see what its doing while the phone is sleeping, but you can obviously infer that things will underclock per your profile settings.
A simple but valuable tool that reinforced things for me.
Hope that helps a little.