Mike -
I don't see how being small or having a low body fat or being heavily muscled will make a difference. Nathan will go in on the first day of practice and pee in a cup. The AD (or someone he assigns) will dip a strip in the cup and it will show if Nate is hydrated enough. If he isn't then he will have to drink some water and retest up until he becomes hydrated. Once he is hydrated then he can step on the scale and get his prelimniary weight. I don't beleive that a heavily muscled small person with low body fat would naturally walk around with a hydration that is lower than someone else.
I am not saying a like the rule. There seems to be a lot to desire in terms of how the hydration test will be implemented. But just like now, you will only be as good as the AD who runs the testing.