I think you have every right to be frustrated. Both of my boys had one teacher who simply did NOT give Es for effort in the first report card. I found it annoying in subjects like spelling where they had straight 100%s on the advanced list. In other words - they were doing everything that could have been done! What exactly *would* have demonstrated excellent effort?
Even this year, my ds10 got his first progress report (which is a very *soft* report full of things like "understands 5th grade material" and had three categories for below level/making expected progress/above level)and he had everything marked "making expected progress." There was a note on the sheet (standard for everyone) saying that the teacher's goal for students was for them to be in that category. Really?!? My kid who goes to the middle school for gifted math is just average on learning 5th grade material? He is THREE grade levels ahead of the standard in math and that's "making expected progress"? But, like you, I love his teacher and so I decided not to fight that battle (the progress report isn't an official report card either). With the earlier teacher, who seemed to have a lot in common with your dd's teacher in terms of being a good teacher, but maybe almost TOO good because she felt like she knew all she needed to know about gifted kids and that she challenged everyone, I did choose to fight. It didn't change anything (since my second son also got all Ss the first term) but I just didn't feel comfortable knowing that he received effort grades based on what SHE wanted to prove, and not on his actual effort.
As far as the reading level, I do think that is a fight worth fighting. My concern is this: why is she being retested from the beginning when she already has proven competency at that level? Do they really have a problem with their students regressing? Their gifted students? If so, perhaps that is an even bigger concern. In the past, we've actually had this problem a few times (thank God both my boys are past these silly assessments). It usually happened when one teacher/aide/specials teacher didn't realize where the testing was supposed to start, tested them on the wrong level, and didn't understand how to administer. I found I had to coach my one son on how to answer (after seeing a few of the assessments) because he would KNOW the answer, but just not say everything the teacher wanted to hear. He didn't need hints, just the teacher saying, "and?" or "is that all you remember?" Once I did that, he actually skipped right through to the end and tested out. If you haven't seen these assessments (not just samples, but the actual ones your dd did) ask the teacher to provide them.
Just because you have a generally good situation doesn't mean that you have no right to ask for appropriate grading/testing/enrichment. I went in like the worried parent - "gee, ds has a 98% average in science and I thought that project he did was way above grade level, but he only got an S in effort. Is he goofing off in science class? What did he do differently from the kids who got an E in effort?" I found that the teachers really didn't want to say that no one got an E in effort, although eventually they admitted it. "Hmmm... is it a really low-achieving class this year?" Yeah, you can be polite and make your point.
Good luck.... don't feel that you should just be "grateful" that the school is doing anything at all. Your requests/concerns sound completely reasonable to me!