The Environmental Protection Agency should have discovered years earlier that a major pipeline company was dumping a cancer-causing substance in 14 states, but officials "lulled themselves in a sense of security" and overlooked obvious clues, Senate investigators reported yesterday.

In a report by the Senate Superfund and environmental oversight subcommittee, investigators also criticized as too lenient a settlement that the agency reached with Texas Eastern Transmission Corp. after finally accusing the firm of dumping polychlorinated biphenyls (PCBs) in earthen pits along a 10,000-mile route.

Texas Eastern agreed in November to pay a $15 million fine and clean up scores of sites from Texas to New Jersey at costs expected to reach $400 million.

EPA spokesman Dave Cohen defended the agreement as "outstanding," but acknowledged that the agency was "slow to assess the problem."

Texas Eastern had used PCBs since the 1950s as fire-retardant lubricant in pipeline equipment. When PCB-laden liquid built up in the transmission system, it was forced out of the lines and released into unlined ponds as deep as 17 feet and as much as two acres in area, according to the company.

Although the EPA knew as early as 1981 that Texas Eastern and other pipeline companies used PCBs in their pipelines, officials say they were not aware of dumping by Texas Eastern until a company admission in 1985.

According to Senate investigators, the EPA should have detected the illegal disposal practice earlier by examining quarterly reports that Texas Eastern was required to file since 1982, when the agency found high levels of PCBs in its pipelines. The company had agreed to remove contaminated residues, dispose of them by burial in licensed landfills or incineration and report its work to the agency.

Texas Eastern submitted the reports on schedule, but they showed a huge gap between residues removed and disposed of. Had EPA officials questioned the discrepancy, it would have discovered the illegal dumping, investigators said.

Instead, officials "took the path of least resistance," accepting the data "without adequate review," the Senate report said. The agency assumed the good faith of the firm, which had proved reliable in the past, investigators said, but officials placed "more reliance on Texas Eastern than was prudent."

"These staff lulled themselves in a sense of security based upon the positive experience they had had in working with {Texas Eastern} on this issue," said the report.

Cohen said that Texas Eastern had not been "particularly forthright" in its reports -- a criticism also leveled in the Senate report -- but acknowledged that "we didn't piece the clues together as we might have liked to." He added, however, that "it's stretching it" to charge EPA officials with lack of vigilance.

Texas Eastern spokesman Fred Wichlep said the firm has not seen the report and had no comment.

According to investigators, the EPA should have moved quickly to notify state officials of the danger. Instead, investigators noted, the issue surfaced publicly for the first time in a February 1987 newspaper report -- 18 months after the agency first learned of the problem at a meeting with Texas Eastern officials.

Investigators said the agency has not informed the public of "continuing discharges" of the pollutant.

"They were asleep at the wheel when the contamination first occurred," said Sen. Frank R. Lautenberg (D-N.J.), the subcommittee chairman who held hearings on the issue last year. "And even after congressional hearings, the states and the public were not promptly informed about continuing discharges."

Cohen said that no more PCB-tainted liquid is being discharged, but "very low levels" of the pollutant that do not pose a health risk may continue to be released in vapors.