I'm sure they don't let men or hermaphrodites compete either. It's their competition, and they want it to be between people who are biologically women, I don't really see the problem here. It's unfortunate for her, but I imagine she didn't disclose the information from the start and it's obviously something that could raise either interests or concerns.
Don't get me wrong, I have nothing against transgendered people, but when you're running a contest for one gender you shouldn't be obligated to include them, and I'm sure she couldn't have been naive enough to think that it wouldn't matter to the people running the competition.