Who decides authorship order?
The answer of JeffE is the morally correct one. The answer of ZeroTheHero is the political one. 

I'll give the self defense answer. If your advisor has power over your future, then I advise you to go along. But move away from her orbit at your first opportunity. What she is demanding is unethical and seems to be trying to boost herself at your expense, rather than supporting a former student as she could. 

But if that power is there, and she has a grudge, then she can use that power to affect your future. You probably don't have any countering power to contest it, though some do. 

The order of authorship, I'll add, varies greatly by field. In some fields there are tremendous fights over it (lots of evidence in posts here). In other fields we just list contributors alphabetically, but they need to contribute. Some with very minor contributions show up in acknowledgements, but not as authors. My advisor (mathematics) helped me a lot and did, in fact, contribute to my dissertation, but no one would have thought he should be co-author. But he was acknowledged and cited. 

In other labs, the PI is always listed (often last) and people make different assumptions about that. Some have said they always assume the last author did all the work. Others assume the last author provided funding and encouragement, nothing else. 

But, in your case, think long term about your career and protect it. This paper may wind up with, to you, an unhappy listing of authors, but it won't be your last work, nor, one hopes, your best. If you need to submit to protect yourself, then do so, but, as I said, move away quickly. Don't look back. Find a better circle of collaborators.