Preheat oven to 350°F.
Sauté rehydrated onions in butter until soft, but not browned.
Whisk in flour, salt and pepper.
Add water and milk, cook until smooth and thick, stirring continually.
Add 1 cup Colby cheese and prepared cheese blend powder, whisk until cheese is melted and smooth.
Add bacon bits, stir until combined.
Remove cheese sauce from stove, combine with rehydrated potatoes.
Pour into lightly greased 9”x13” baking dish. Top with additional ½ cup Colby cheese.
Bake 20 to 25 minutes.