Indeed, Large cities, require essence, small cities for resource aquisition or farming, don't officially produce anything other than raw-resource, mana node, or food, (dont build buildings or units), don't require essence, and are instead built by population consuming settlers inside a "real" city.
A strategy could even be to ICS tiny settlements in order to ship 2 squares of food apiece to a large super-city ... which I don't mind since the main factor will probably be relative prestige value anyways ... and that extra population could end up emmigrating to someone else's cities if you aren't careful. Perhaps settlements could also be tax payers ... although they would not be centers for education. Now, if a settlement was a center for a secret experimental laboratory, that would be acceptable (improvements to allow scientists to directly grow the raw technology score), but anything inside the settlement would be unheard of.
This strategy tends to lead the question about road development, walls development, and fort development. I think that a military unit (or special military unit with shovel) should be able to build roads, walls, guard towers, and Fortresses.
Walls and Fortresses, especially Fortresses, are Incredibly expensive to build (gold-wise?) ... and maintanence is pretty regular on well-built roads, forts, and guard towers. Anyways, while maintanence keeps from infinite road spam ... expensive walls and forts encourage the player to only build them when/where it is needed.