If disclosed, and the customer also receives an indirect benefit (cheaper service), is this any worse than similar tracking via the Google Toolbar, and all the various page-insert sensors (Analytics, AdSense, +1, etc) reporting a significant and growing amount of all web activity back to the MotherPlex?
(That is, setting aside the obviously evil practice also alleged in this article of sometimes using these redirects for click fraud.)
This assumes that the customer has the option of choosing another service if they don't want to "opt-in" to such bullshit.
Sadly, in many places in the US, especially those places served by the ISPs mentioned, that is not the case. In the absence of reasonable choice (roughly the same speed of service) this becomes something that should be regulated.
Again, these kind of things would all go away if we had public last-mile fiber that ISPs could lease. Regulation is a poor substitute for true competition.
The customer usually has the choice of self-help against such bullshit, even without changing ISPs, via using alternate DNS servers, a VPN, or other techniques. Education remains a better solution than regulation.
...makes it clearer the affiliate-payments scam, making these redirected searches look like paid clickthroughs, is central to the Paxfire approach. That's clearly fraudulent, and not equivalent to the Google tracking. (If they were just collecting interest/trsffic/targeting info, then the equivalence I suggested above would apply.)
(That is, setting aside the obviously evil practice also alleged in this article of sometimes using these redirects for click fraud.)