This is probably one of the most talked about changes to a weapon in TF2. It seems like a dumb idea to most people, but here's what I think.
Competitive matchmaking is the next step of evolution for TF2. There are multiple game files that have been added since the last update, and they all point to competitive. A competitive mode would make Team Fortress a viable alternative for those who aren't interested in CS:GO, or gave it up.
I think that Valve has a list in their backend of all weapons and how many people use them. From Valve's point of view, weapons that get used the most get nerfed (most likely because they're broken, and people overuse/abuse them). For example, the Jag was a very popular wrench, so Valve nerfed it, thinking it was too strong against other classes. I was pretty upset about the nerf against the Jag, but I could definitely see why Valve made the changes they did. The same goes for several of the other changes.
Now, on to the Phlogistinator. The Phlog was a challenge. What should be done for this weapon? Nerf it? From Valve's view, I don't think they could find a way to balance it so it's equivalent to all other flamethrowers and not annoying to play against. Make a slower walk speed? Just equip the Powerjack, and it's eliminated. Increase the damage penalty? That only slows the inevitable "Mmph" mode.
And with comp coming, how could they adjust this weapon? From their backend, they saw it wasn't as used as the Degreaser (which, by the way, got nerfed), so it has to be made stronger. Or else, they must've thought, no one would use it in comp mode. And that would present a balance challenge. I think Valve wants every weapon to have around the same amount of players using it.
Another thought that I had was maybe this is just a test run for the Phlog. I think they want to examine how players use it in pubs and in sixes, highlander, etc. Then, maybe they'll adjust it in a future update, according to the data they've collected.
Do you guys agree with my theory? Let me know it a reply below!