No it was actually designed to allow smaller school, RC in this case, to compete in the Region. They were not thinking about competing in state competition.
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Unless a team can be competitive in their Region, it really doesn't matter how their enrollment compares with the rest of the state.
It would seem to me it would be based on regional play because if it was designed to be implemented at the state level, they would take the largest single A school in the state and any school that had half of that school's enrollment would be able to play in Division 1...cuz there are a few single A schools in the state larger than Lee.