There does not appear to be much choice for you, unfortunately. If dad is involved with drugs, grandma, in whose care dad left your niece, is a drunk and both are physically and emotionally abusive toward her, you must take whatever steps are necessary to protect her. Foster care would probably be preferable to that environment. However, if you have neither you nor any member of your household has a felony conviction or history with LA County's DCFS or other such CPS agencies, then the law provides you (or other willing relatives) the right to placement preference should you be willing to take your niece in. Although the DCFS and other CPS agencies often make excuses for refusing to place with relatives (no money in it for them), one need only hold their feet to the fire by hiring competent juvenile dependency counsel to press the issue in the juvenile court or by hounding minor's counsel to make it happen (good luck with that). If you have ever provided care for your niece for any extended (not necessarily long term) period of time during her life, you might qualify for defacto parent status and standing to appear as a party in the dependency court with an attorney of your choosing to represent you. First and foremost, however, you have the moral if not legal responsibility toward your niece to do all you must to protect her from the abusive, neglectful environment in which she has been thrust. Good luck.
The following answer represents the legal opinion of the attorney regarding a hypothetical situation. It is not intended as legal advise in an attorney/client situation. The answer to the question posed is not to be relied upon as legal advise. The questioner is advised to independently seek the counsel of a qualified lawyer with whom he or she can establish an attorney/client relationship.
There may be an alternative strategy to foster care. You may consider filing for legal guardianship in the Probate Department of the Los Angeles Superior Court. If you first gain temporary legal guardianship, you may avoid DCFS and foster care altogether.
If the choice is the concerns you voiced above and not reporting essentially leaving the minor child in this environment or reporting at the risk of possible foster care yet she will have a somewhat normalized life again. It would appear the scales are tipped in one direction. Both Mr. Massey and Mr. Davis offer you good quality advice and I would concur with both. Seems to me your options are as follows:
1. Petitioner for a guardianship over the minor child yourself by filing such a request through probate court based upon these concerns you expressed above;
2. Make a DCFS hotline referral and ask the CSW to allow the minor to stay with you as a relative caretaker?
3. Or do nothing and .....well not really an option I would advise given these facts.