The more I think of this idea, the more I like it. There are many concerns that have been raised, but with a little bit of thought I definitely think they can be worked through.
I agree that the D2 needs to be at a different location than the D1 competition. I'm not saying it can't be held at Disney, but on a different stage than at WWoS, probably in a separate park, or at a hall in a nearby convention center. If it would work logistically to bring the D2 finals into the Milk House, than why not? Just be very wary of overcrowding issues.
As far as the cut-off to qualify for D1 vs. D2 based on population of the gyms, I say throw that away completely and simplify. Instead, simply have it set up so that if there is any L5 Senior team that wants to be a candidate for a Words bid they must declare their intention to be D1 or D2 before the first Bid competition of the year (November). It doesn't matter the size of your gym. I would add one stipulation though. If a team that declares as D2 realizes that they might like to have a shot and compete with the D1 teams, they may re-declare by March 15 (or some time within a few days of NCA giving out their bids). It doesn't work the other way though, if you declare D1 early, you have to stick with it.
This would allow EPs to be a little more selective in their awarding of paid bids. I would imagine that most EPs would want to have D1 teams representing their brand, so they would be given the ability to decide early how they are going to award bids. Not saying they won't give paid bids to D2 teams, but they will still have some control as to how their bid will be represented.
It would become a trade-off for teams as they decide to go D1 or D2. To me, if a team wants to have the challenge to compete on the big stage with the best in the world and possible hold their own, they go D1 and let the cards fall as they may. Other gyms who realistically know how they stack up will be smart to declare L2.