my take:
Dennis,
according to Table 12, (4) 4/0 woud be legal in a 2" Sch 40.. right ?
but, as you pointed out, the derating would make it a 164 amp conductor.
I did not, however, see a service "size".
newt,
I don't know what to tell you. If you are the "inspector" you have Code violations to use as a rejection. If it's a 200 amp service, the derated wire is 164 amps. The grounded conductor is supposed to be run with the phase conductor. I don;t know if the meter needs the grounded conductor to operate. If not, the bond to the meter addresses bonding.
Considering where it is (outside, on a pole) the install is probably not "unsafe" as such IMHO, but it is not Code compliant.
From an inspectors standpoint, it should be rejected. Your profile says "utiliy".
and I',m a bit unsure what to tell you.