You are correct. I just looked it up in the 2016 - 2017 Pac 12 Handbook. They take the conference champs unless they are in the Playoff. If not in the playoff:

a. Replacement Team Selection The Rose Bowl will select the highest rated remaining team in the final College Football Playoff Selection Committee standings as a replacement team when the Conference champion is selected to play in a College Football Playoff semifinal game. There are two limited circumstances under which the Rose Bowl may consider selecting a team other than the highest rated team. (12/13) (1) The highest rated team will be making its third consecutive appearance in the Rose Bowl game and at least one other Conference team is ranked within three positions of the highest rated team in the final College Football Playoff Committee rankings and the lower rated team beat the higher rated team during the regular season. In this case the Rose Bowl will have its choice between the highest rated team and the next highest rated team from the Conference. (12/13) (2) No teams are ranked in the final College Football Playoff Selection Committee standings. In this case, the Rose Bowl will have its choice of bowl eligible teams within one Conference win of each other (e.g., assuming the best remaining bowl eligible team had 7 wins in Conference games, the Rose Bowl may consider teams with 7 or 6 Conference wins) Among its criteria for selection, the Rose Bowl will consider head-to-head competition between the teams, most recent Rose Bowl appearance of the teams and consideration of which team would create the most compelling Rose Bowl game match-up from a ticket sales and television audience perspective. (12/13)