I'm not trying to defend AT&T, but to me it looks like She ignored the forced upgrade notice, didn't read that her service would be disconnected and then at that date it was disconnected. She called back and mentioned she was disconnected and wanted to sign up for u-verse to get her internet back. Since she wasn't at that time a customer, all of the normal setup fees applied.
Can AT&T still be at fault absolutely, to cut off a paying customer's service just because they don't respond to a letter about an upgrade and they should have caught that she was disconnected because she didn't upgrade and waived the installation charges.
But what it doesn't sound like is that these free upgrades aren't really free if the customer responds to the letter and makes an appointment to upgrade there service, though their monthly plan will go up after the promo rate expires.