Preheat oven to 350 degrees. Grease a 2 qt. baking dish, set aside. Melt butter in a large saucepan over low heat. Stir in flour, salt and pepper until smooth. Slowly add in milk and bring to a boil. Cook and stir until thickened (about 2 minutes). Remove from heat, stir in cheese until melted. Add potatoes and onion.
Transfer to prepared baking dish, cover with foil and bake for one hour. Remove foil and bake an additional 20-30 minutes or until potatoes are tender. Top with crumbled bacon and return to oven for about 10 minutes. Allow to rest for 10 minutes and garnish with chopped chives. Serves 8.