This makes no sense to me. You say that S2 stays at 0 in the Hardware Monitor when switched between all three positions and also state that everything works in the Hardware Monitor. That is not possible.
When moving S2 (Pan Mode Switch) Up is position 0 and the camera should face forward at all times no matter what position the Pan Knob (K1) is in. At the middle position 1 the camera should be moveable with K1 and should point to the left or right according to how far K1 is moved. Position 2 is the bottom position (global) and the camera will Pan left or right according to movement of K1. The more K1 is moved off center the faster the camera pans in that direction. Once K1 is returned to center the camera stops panning and will retain its heading regardless of a change in aircraft heading.
On the main screen of the ST16 double tap the Volts icon to bring up the Final Output display. Watch Ch10, with S2 at 0 it should read -100%, at position 1 it should read -40%, and at position 2 it should read 100%. Now watch Ch8, with K1 at center it should read 0%, with K1 at full left you should read 100%, and with K1 at full right the reading should be -100%.