Yeah, the tag will let the new .utc 'pretend' to be the character you're replacing.
http://www.lucasforums.com/showthread.php?t=149992) will show you how to do what you need to do to create a new appearance (the tutorial is for making a new PC, but it will show you the steps you need to make any new, complete, appearance). Learning how to use TSLPatcher to alter the .utc file so that it will be compatible with the widest variety of players is good, too.
Don't alter the line for the original character unless you really want to and it's for your own game...most people like to be able to uninstall a mod, and altering the replaced character's line makes that very difficult to do.