I would do the size 0 based on their bust measurement. If you scroll down underneath the pictures of the pattern you will see the finished measurements given (under the fabric allowances). You will see that there is some 5.5 inches of extra measurement given for the bust alone. Basically it is a loose fitting dress so with this in mind, the hip measurement doesn’t really need tobe considered. The most important measurement required is the bust.
My daughter has small hip measurements also, so I can understand where you would be confused/ concerned.
I think the size 0 will be spot on for what you are doing. It will fit them for a while😀.
Adding length is pretty straight forward too. I am sure Liesl has included a lengthen shorten line in the pattern (I’m away from home so can’t check). This is a good guide for where to add/ take length if it is required.
Hopes this helps.