I think that, in her youth (many thousands of years ago), Celestia married and had foals. Hell, she may have had many husbands over the millennia. As 'Great (x20) Grandmother is rather unwieldy, she refers to all the descendants of her various children as her nieces and nephews (such as Blueblood). However, I suspect the reason she calls Cadence her niece is because she's an alicorn and she prefers to act as if all the members of the Divine Race are kin.
How does Celesti have a niece anyway? That would make her Luna's daughter! WTF? Then Luna missed her daughter's whole wedding... But no actually... Cadence is older than Luna isn't she? Or the same age, right? So Celestia is Cadence's mother.... Or do they have another sister? Or is Cadence the princesses' adopted niece? Maybe Celestia is the mother O_O... Uh... WTF????!!!!?
Twilight is pondering the parentage of Cadance; knowing that she is Celestia's niece and that Celestia only has one sibling (to her knowledge), Twilight postulates that she was begat by Luna. This is incorrect, to Luna's great chagrin. Now at a loss for explanation, Twilight questions Celestia who reveals that she has in fact dispatched as many siblings as there are moons available in their pony galaxy.