Bringing our foreign readers up to speed:
New Zealand runs a variant on PR called Mixed Member Proportional Representation, modeled on the German system. Parties enter Parliament if they either earn 5% of the Party Vote, in which case they're given seats proportionate to their share of the Party Vote, or if they win an electorate seat, in which case they're also given seats proportionate to their share of the Party Vote. A minor party earning 4% of the Party Vote (voters make two ticks on their ballot - one for their electorate MP, one for their preferred Party) gets zero seats unless it also wins an electorate, in which case it gets about 5 seats in total.
The Green Party consistently gets around 7% of the vote but no electorate seats; it consistently enters Parliament and its voters don't have to worry about wasting their vote.
The ACT Party consistently gets less than 5% of the vote and so is dependent on winning leader Rodney Hide's seat in Epsom. Hide's fortunes in Epsom depend on National winking at its voters to tell them to give Rodney the electorate vote while giving their Party vote to National.
ACT was a fairly principled liberal party, then was decimated in 2005 when Don Brash, then National leader, ran a campaign that drove ACT out of the market. If National were going to support liberal policies, why support a minor party? Brash lost, and ACT was down to two MPs. ACT came back in 2008 with 5 MPS pushing a more right wing than liberal platform, with lots of policies appealing to the law & order constituency. Hide in particular seems to have viewed a move to being a reliable partner to National as being of utmost importance this session and so took on one job - the Auckland city amalgamation - handed him by National as a chance to increase his profile and to demonstrate competence on a major initiative. Of course, city amalgamations are rather antithetical to basic Tiebout considerations, and ought be viewed suspiciously by liberals, but that was of minor concern. Proving steady hands and a willingness to do the grunt work in order to get concessions on things like the Regulatory Responsibility Bill he viewed, I think, as more important.
Internal scraps within ACT led to leaks of Heather Roy's complaints against leader Hide, then leaks of material David Garrett disclosed to the Party prior to his running for office that led to his resignation from Parliament. After Garrett resigned from the Party but before he resigned from Parliament, Prime Minister John Key announced that he was prepared to work with anyone from ACT except for Sir Roger Douglas.
It's been obvious for a while that Key wants massive distance between himself and Douglas, mostly because folks view Douglas poorly. Douglas wears all the blame for the transitional costs of economic reforms with most voters and is given none of the credit for the longer run benefits; he also supports economically liberal policies that might scare off moderate Key supporters. So John Key told reporters that he'd work with anyone except Douglas and that he opposes the "far right" economic policies that Douglas supports, including a bunch of things that Brash campaigned on in 2005 and other things that National supported while in Opposition.
Douglas then, understandably, tweeted "Why's Key so afraid of me? He then put out a press release with a cute ad showing himself and the policies he supports for achieving National's stated goal of catching up with Australian incomes on one side, and a man with his head in the sand on the other, labeled John Key.
Now, if the point of a National-ACT coalition is that Key gets to blame ACT for a bunch of economically liberal policies while maintaining appeal to moderate voters, you'd then expect ACT to rally behind the Douglas ad and reassert its liberal policies while Key made a show of opposing those policies.
Instead, Rodney Hide steps up to defend John Key against the Douglas ads. The head of a minor party sides with the PM against one of his MPs.
John Key was probably trying to throw a lifeline to ACT. The more he reminds economic liberals about ACT's economic liberal policies and how moderate he is relative to ACT, the fewer voters flee back from ACT to National and the easier time Key has of taking the middle tack. That was the point, I'd think, of his gratuitous swipe at Douglas. And, the more folks are talking about ACT being a party of economic liberals who care about principles and policy, the less they're talking about ACT's numerous other troubles.
A contract paying $1 if ACT returns a single member to Parliament at the next election is now around $0.58. At what contract price does this become self-fulfilling prophecy as National would then have to run a serious candidate against Hide in Epsom? ACT's going to have to pull something out of the hat soon....