Exetel has landed in hot water with the consumer watchdog after it terminated 2400 of its heaviest broadband consumers.

In May last year the internet service provider started informing 400 out-of-contract residential broadband customers that their services would be discontinued due to "exceedingly heavy usage".

That number over the next few months rose by a further 2000, to include heavy use customers with current contracts.

"We believe it is unfair for current users to subsidise a handful of exceedingly heavy users who have not re-contracted with Exetel at our current, and very competitive prices," chief marketing officer Ben Colman said at the time.

"For the benefit of all our customers, we've taken the difficult decision to let go a small number of users. In this instance, the number of customers is higher than we'd expect, or like to see."

Exetel gave the affected users 30 days to churn to another provider or Exetel plan.

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The move was a repeat of action taken in 2010 to get rid of 500 similarly heavy usage customers the company deemed unprofitable.

However, the Australian Competition and Consumer Commission took issue with the mass customer dumping and commenced an investigation into 2000 of the terminations, which found Exetel had breached Australian Consumer Law.

The ACCC today said Exetel had agreed to compensate affected customers.

"Exetel relied on a clause in its standard residential broadband agreement which provided that Exetel could vary any part of that agreement for any reason," the watchdog said.

"Following an investigation, the ACCC considered that the clause was an unfair contract term which was likely to contravene the Australian Consumer Law (ACL)."

The company has agreed to refund any activation charge that customers who chose to terminate their service had previously incurred, the ACCC said.

It also said that for customers who chose to move to a new Exetel plan, the ISP would refund any additional monthly subscription costs incurred for the remainder of their fixed term.

Exetel will also remove the unfair contract clause from its standard form of agreement for residential broadband.

CEO Richard Purdy said the company had been forced to react to the local introduction of streaming services like Netflix, which have "fundamentally changed Australian internet usage patterns and spurred a large increase in data usage".

"Our strong network performance over this period reinforces the need to manage our network for the benefit of all customers," he said in a statement.

“We apologise to customers who were impacted by this decision and have already made a number of changes to address this situation, including changes to our terms and conditions."

The watchdog plans to write to other internet service providers to warn them of using similarly unfair conditions in their customer contracts.

“The Australian Consumer Law provides that unfair contract terms in standard form consumer contracts are void,” ACCC acting chair Dr Michael Schaper said in a statement.