Peter,
This is something I deal with regularly (except my CAD stuff is dgn/MicroStation). The answer is, it all depends on what you want to do and your workflow.
So, questions, do you need the new waterline to completely overwrite the old waterline? Or are you just adding on?
Would it be a major pain if you added a new line and got rid of the old line (pain meaning redoing all the attributes, etc.)?
I deal with land parcels going form CAD to GIS frequently. When I get my original dataset, they come in, I give them the appropriate attributes, and we're good to go.
If I get brand new parcels to add to my set, there are a few ways to go about updating my data (everyone has their preference). I pull in the raw CAD data into GIS and depending on the complexity of the parcels I eventually add it to my master list. So, if it's s simple square, I can digitize it it. Otherwise, I usually just sometimes copy and paste the new geometry into my active layer. This requires some quality control to make sure things came across appropriately but it works out. The alternative is importing the new CAD data into a new feature class in your geodatabase and then appending that data to your existing set. I don't like having a ton of one-off layers in my GDB so I don't always do this.
When I have to fully replace existing geometry with new geometry, this is a little more tricky. I usually bring in the new geometry on top of the old one, bring it in as a new feature into the same feature class, copy the attributes over, then delete the old feature. Of course, you have to quality control this stuff to make sure things are looking the way they're supposed to look. My biggest issue I find is geometry issues. Performing a Repair on the geometry fixes these.
I hope this helps but let me know if you have more questions about workflow.
