what does having a smaller squad size have to do with initiative??
Why is the choice of initiative tied to the points you spend on your squad?
There's no thematic explanation, but mechanically it's because a list that sacrifices points is at a disadvantage. You can take that disadvantage in order to gain the advantage of (now) choosing whether to shoot first or move last with your high-PS ships, as well as whether you want to place the first or last asteroid.
What's the big deal with a 1-point difference in squad totals, and is that really a big enough sacrifice to be worth gaining the right to make the initiative choice?
A 1-point difference in squad totals isn't that big, but initiative is typically also not that big.
But building at 99 isn't going to get you initiative in every match, either, so it's not necessarily a 1-point difference. Building at 98 makes it more likely, and building at 95-97 will probably get you initiative almost every time. What I like about this is that it's going to be a perfect economy: once these changes have a chance to propagate through the metagame and settle a little bit, the community will have agreed on how much initiative is worth (at least for some major list archetypes).
And I doubt that value will actually be 1, since if you have one of those rare lists for which initiative is important, it's really important, and the marginal value of cutting your list to 98 or 97 will probably be high enough to support that decision--and you'll need to avoid those lists that hang out at 99 because there just wasn't a particularly convenient or meaningful way to spend that last 1 point.