A regional fuel tax will be scrapped and KiwiRail instead of councils will buy electric commuter trains the revenue would have paid for, Prime Minister John Key indicated today.

The Herald earlier obtained a letter from Transport Minister Stephen Joyce to Auckland Regional Council chairman Mike Lee in which Mr Joyce said it "makes sense" to consider whether KiwiRail should buy and own all new passenger trains planned for Auckland and Wellington.

The previous government's plan was to allow regional councils to impose a fuel tax to pay for transport projects, including the $1 billion electrification of Auckland's metro system.

The regional fuel tax would have increased the price of petrol and diesel by 9.5 cents a litre, and Mr Key said it was a "highly inefficient" way to raise money.

"For instance, if you had a petrol station in the Bombay Hills who is going to fill up there when just down the road you would pay 9.5c less," he said on NewstalkZB.

"There's a lot of inefficiencies in that system, and a lot of councils...the Government is considering its options."

Mr Key said that as the Government owned KiwiRail there was an argument in favour of consolidating all the rolling stock, the rail tracks and the operation into one entity.

An announcement is expected this week, when the Government is also likely to confirm it will drop the regional fuel levy.

Stephen Joyce's letter obtained by the Herald follows concern from Mike Lee about how the council would pay for the rail electrification if the Government got rid of the regional fuel tax.

The council was relying on the tax to produce its $496 million share of the project.

In his letter, Mr Joyce said he believed it was "premature and unnecessary" to talk about increasing council rates.

The Government was committed to the project and this, combined with its ownership of KiwiRail, had prompted it to consider taking over as owner.

Yesterday, Mr Joyce confirmed it was a possibility, saying the Government would pay for the trains anyway.

It would be more efficient and would reduce overheads if one body owned all the trains.

The council-based funding plans had made sense when private company Toll Holdings owned the national train service, but its return to public ownership changed the situation.

"Whether it's a regional fuel tax or other means, the Crown is in effect funding those rail purchases, such as electric trains," Mr Joyce said.

"The question is, does it make sense for those to be held by the regional organisations now that KiwiRail is 'back in the family?'"

He said it was a logical time to make such a move as the Auckland and Wellington regional councils were due to make significant purchases.

In his letter to Mr Lee, Mr Joyce acknowledged that if the regional fuel tax was canned, the Government would have to pay extra toward the cost of buying the new trains.

But the fuel taxes were an expensive way to obtain extra revenue and the Government was mindful about their impact on road users' pockets.

Labour's transport spokesman, Darren Hughes, said Mr Joyce risked jeopardising the electrification project by interfering with its financing mechanisms at such a late stage.

Auckland's regional transport committee is expected to consider the letter when it meets this week for its monthly discussions on transport strategy.

Mr Joyce's letter urges the regional council to take "a short pause" from going ahead with its commitments until after the ramifications of the report from the Royal Commission on Auckland's Governance were sifted through.

The commission is due to report back at the end of the month.

The regional council's transport arm, the Auckland Regional Transport Authority, has sought expressions of interest in supplying and maintaining 140 new electric units.

It is due to invite formal tenders from a shortlist of four companies in May.

Mr Joyce's letter suggests that KiwiRail would take over the process if the Government decides to go ahead with plans to become the train owner.

It is likely to apply only to new stock, rather than any existing trains owned by the two councils.

Mr Joyce said a decision on the issue would be announced with the final decision on the regional fuel tax this week.

The national fuel tax will increase prices by 1.5c a litre a year until 2012.

The regional fuel tax would have been on top of this. It was expected to raise about $110 million a year for the Auckland Regional Council.

Of the 9.5c a litre, 8c was to go to the rail project.

The rest was earmarked for the Penlink roading project linking Whangaparaoa Peninsula to State Highway 1 at Redvale, ferry terminals and an integrated ticketing system.

- With NZPA