Heat oven to 350°F. Spray 2-quart casserole with cooking spray.
In 10-inch nonstick skillet, melt 2 teaspoons butter over medium-high heat. Cook onions and bell pepper in butter 2 to 3 minutes, stirring occasionally. Remove from heat; set aside.
In 3-quart saucepan, heat water, half-and-half and butter to boiling; remove from heat. Stir in both pouches of potatoes just until moistened. Let stand about 1 minute or until liquid is absorbed. Beat with fork until smooth.
Spoon about 2 cups of the potatoes into casserole; top with half of the onion mixture and 3/4 cup of the cheese. Spoon another 2 cups potatoes over cheese; carefully spread to cover. Sprinkle evenly with remaining onion mixture. Top with remaining potatoes; carefully spread to cover. Sprinkle with remaining 3/4 cup cheese.
Bake uncovered about 30 minutes or until hot.