If your using a genuine Heat'n'Grow unit, they are definately designed to be used with the capillary felt WET.
Using it dry could possibly damage the unit over time, the unit would have to work heaps harder to achieve the desired temps when dry.
The moisture is needed to transfer the heat evenly to your pots/trays/containers etc.
I take my capillary felt completely out (just pop off that little silicon blob holding it down) and submerse it completely in a weak bleach/water solution for a few minutes.
Squeeze it out very lightly and place back into the unit.
As I mentioned, covering the felt in glad wrap stops the water evaporating away too quickly and it stays wet for quite some time.