It's pretty simple. PSU was ranked higher because they had more wins. PSU had 11. OSU had only 10.
Although Team B was 0-2 against Teams A and C, it had more wins than team A. Hypothetically, the computers say that Team A would have actually been 1-2 if it played the same extra game as Team B, because it would predict a loss to team C again. But Team A didn't even earn the right to have that extra game because it had two in-conference regular season losses. Team B only had 1.
I also have an issue with 11-1 PSU being ranked ahead of 10-2 OSU going into championship week. Too much emphasis was put on the Michigan loss and not enough emphasis placed on the GREAT win that OSU had....at PSU. OSU had the much more difficult schedule going to Oregon, PSU, and playing IU at home. They went 2-1 in those games. PSU went 0-1. I would have had 10-2 OSU ahead of 11-1 PSU based on SOS and the head to head. Then when PSU matched OSU's Oregon loss, it was a no-brainer to rank OSU ahead of them.