SCE could make the PS3 smaller; it's just a question of whether the costs involved with a redesign will yield per unit savings that offset it. Personally, I don't see why not.
With another CPU/GPU die shrink, heat would be much less of an issue. Considering that there are currently slim form laptops with better CPUs and discrete GPUs cooled with tiny fans, it's not an issue of "if" but an issue of how cheap.
After all, the main reason for redesigns is cost savings. The additional benefit of being able to market an old product as being "new" again is really only secondary.
External power bricks will reduce the size of any device naturally, and any power brick used in a redesigned, low power use PS3 would be pretty tiny (think typical laptop sized PSU if not smaller), I'd prefer an internal PSU, not that it really matters once the thing is plugged into the wall.