Anyone who's been following blogs and reports about Big Ten divisions has probably read that exact argument about 50 times in the last three weeks. People like me aren't advocating geographical divisions because we've never heard someone argue that you can't have PSU/OSU/UM in the same division. A lot of us just don't agree with that argument for a combination of reasons.
Technically that's not true as MSU has trophy games with both PSU and Indy. MSU/Indy (Old Brass Spittoon) is not currently protected. MSU/PSU (Land Grant Trophy) is an annual affair since PSU joined, but is considered an artificial rivalry by most people on both sides. You've done a pretty good job juggling the complex array of Big Ten rivalries, but claiming to have met criterion 2 "pefectly" is off-base.
Michigan/Ohio State obviously needs to be handled delicately. Even the Eastern SPorts Network calls it the biggest rivalry in sports -- ranking it ahead of their beloved Yankees/Red Sox and Duke/UNC rivalries.
Yes, you've kept it an annual game, but at the expense of opening up the "protected crossover" can of worms. Also, if a year-end rivalry holds the potential to be replayed one week later in a CCG, that wouldn't go over well with anyone. I'm pretty sure it would be sacrilege to UM and OSU. And your Nebraska/Penn State "protected crossover" game would also stand a good chance of being a year-end game, too, creating another potential "one week rematch" scenario.
Well, you have Nebraska and Michigan sharing one division while Illinois and Penn State share another division. Your divisions constitute contiguous groups of states, but there's still a lot of geographical stretching involved. Once again, your claims of perfection in this regard seem to be a reach.