B'Y'laggo was a elemental spirit worshiped by the Bre'Unor. Given that malevolent spirits can enter the physical realms of the Myth world quite easily--it is conceivable that she was an evil ruler of some sort. Whether she was a fallen lord, a demon, or something entirely different is subject to conjecture.
It should be noted that B'Y'laggo had powers that she bestowed on the Bre'Unor. She could probably control lightning, she probably had access to wind dreams, she gave the Bre'Unor ability to control wolves, and she could animate dead trees to come back to life and attack the Bre'Unor's enemies.