Tex:
"If you have a permit system and inspections, there is a very thin line concerning repair or upgrade work: how far do you require existing conditions to be fixed? If someone gets a service replacement, do you consider this a major change and force him to ground all his old ungrounded circuits, add all receptacles required by current code?"
We here in NJ have a 'Rehab' code as part of the NJ UCC. It's involved to get into here, but to answer your question 'Jersey style'
A service upgrade is considered minor work, and falls into rehab. Updating the grounds (GEC's) and bonding the water piping (if metal) is all that is required. AFCI's are not required. We (AHJ's) cannot require any additional work, other than any visable life safety items we may trip over while at site.
