Your argument doesn't make too much sense, at least to me. You race who turns up in your category. It's like saying if your daughter lived in Kenya she would have to race for 1000th place because the high schoolers there are so good, she's lucky she is competing in California.
You can't just write everything off as being fine because there are other races that are faster!
As far as caring about "her performance against herself and doing the best she can regardless of the competition" - racing doesn't work like that for most people. You don't turn up to the Olympics and think oh well, I'll just do the best I can against myself. You turn up to try to beat who is there. Which is why, for example, if there is unfairness in e.g. the women's 800m it rankles because people are deprived of medals that they should've won. There are rules to try to keep it a level playing field - categories such as age, sex etc.
I understand that you're trying to draw a comparison between the racing in Maine and the racing in California but it simply doesn't work like that. It would be unfair in EITHER state. If someone raced as a male one year then the next year raced as a female, they still have the advantages from their prior racing and training but not so much that, all of the biological advantages (testosterone but not just limited to that by any means).
I can see why she was upset.