The reason is it's hard-coded for the rebels to have a capital. IIRC Terhazza starts out as the rebel capital, but it can change depending on city revolts and so. The A.I. likes to place it capital in the middle of it's empire, while Terhazza it right on the edge. Weird things occur when a rebelling city is designated as the eleutheroi capital: it can spawn all units regardless of faction or area-of-recruitment.
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