[charlieluce]

Damage is the base Power to which you are adding the Modifiers (note "Damage" in the blue header bar), so you increase it where it says Power Ranks at the top left (currently at 1 in your picture). Increase that to 8 and you will see the Psi-Knife you expect.

You'll want to use Alternate Effects to add any additional choices of Offensive Powers you want on the character; they don't modify the base Power.