Alternating automata
Expanding on Markus' answer a bit, note that the alphabet $\Sigma$ is in turn the powerset $2^{Prop}$ of the set $Prop=\{p_1,\dots,p_k\}$ of atomic propositions, i.e. it represents the set of valuations $a:Prop\to\{T,F\}$ of the $p_i$.

In the LTL formula, most boolean subformulas involve only a few of the propositions. In the translation, any such subformula corresponds to the set of all valuations $a\in\Sigma$ satisfying it, which is typically large. Using $\Sigma'$, you still only have one transition.

For example, Figure 1 in the paper shows an automaton with transitions labelled simply by $p$ or $q\wedge\neg r$ (where $p,q,r$ are the propositions from the formula). Using $\Sigma$, for the first you would instead have four transitions labelled $\{p\},\{p,q\},\{p,r\},$ and $\{p,q,r\}$.