It depends which edition of
Les Misérables you take, though. Mine (in French!) has just got 'Digne' in it.
I suppose the practice of designating cities and sometimes even people with just the first letter or the initial is a kind of means to set the story in a place without naming it exactly because 'it might be true'. As you do in your own diary. If you want to name the person you're in love with and you don't want anyone to know, in case someone might just read your diary, then you just put his initial rather than his own name.
Not that no-one knew what city it was, though, because there were not a lot of cities with bishops in it starting with the letter D and in the neighbourhood of Toulon where Jean Valjean came from.
But with the letter and diary connotation, you do bring the story on a higher level of truthfulness than your book would be if you just named the time and place.
On top of that the using of only intials makes the story timeless and placeless, universal. If you were to name the place, and consequently the bishop, people would be able to check and so determin the time of your story, which makes it narrow to one person in one place. Here, Hugo universalises the city and also his Jean Valjean and the bishop who buys his soul.
I don't know if this practice is really limited to French literature... Jane Eyre took place in ___shire, P&P had Mr Wickham belonging to the ____shire regiment. So there are English works that also refer to places in a kind of 'you are not allowed to know'-format.