Sydney's tried this before.
Early in the 90's the Sydney comp. was expanded to include Newcastle and Canberra. Unfortunately, both teams were punted after a very brief time, mainly because teams disliked the travel. In the interim since, Canberra joined the Brisbane comp, whilst suprisingly, the Newcastle grade comp. has strengthened greatly, in some places, it outmuscled league.
As of last season, Canberra was re-instated to Sydney Premier Rugby (aka first grade) because once again, travel (this time to and from Brisbane) was a huge issue (despite the fact that Canberra were the 03 Brisbane grade champions!).
I think the expansion of the Shute Shield is great, first step to a national comp. and all, BUT these days the Shute Shield is a glorified reserve grade competition (in fact, once Super 12 finishes, the Shute Shield actually becomes the reserve grade comp. and first grade contests the for a faceless commercial trophy) so it's only a token measure to get this underway, as the Newcastle and Illawarra teams will be excluded from 'Premier Rugby'.
As for conflicts with the state unions? I'm not to sure about that. I imagine were it ever to be expanded to a national competition, they'd probably fold some of the existing first grade clubs into the second division suburban comp, and keep maybe the 4 strongest ones, and do the same with Brisbane's first grade, which would include the Gold Coast team in the Brisbane comp, so then you have maybe 8 teams out of Sydney, Brisbane, The Gold Coast, two more from Newcastle and The Illawarra, Then you have Melbourne and Perth, who's suburban competitions are really only strong enough to justify the one team as is. Then put a team in from either Adelaide or North Queensland (the original directive was for Adelaide to be included after the competition got started, as of the major cities, it has the weakest club comp.) and you have a 12 team competition, with a fair bit of tradition in Sydney and Brisbane to back it.