Chunky Potato Soup

3 medium red potatoes, peeled and cut into 1 inch cubes
2 C water
1 small onion, finely chopped
3 Tbsp butter
3 Tbsp all-purpose flour
crushed red pepper flakes
ground black pepper
3 C milk
1/2 tsp sugar
1 C shredded cheddar cheese
1 C cubed cooked ham

Bring water to a boil in large saucepan. Add potatoes and cook until tender. Drain; reserving liquid. Set aside. Measure 1 cup cooking liquid, adding water if necessary; set aside. Melt butter in saucepan over medium heat. Add onion to saucepan; cook, stirring frequently, until onion is translucent and tender, but not brown. Add flour to saucepan; season with pepper flakes and black pepper to taste. Cook 3-4 minutes. Gradually add potatoes, reserved cooking liquid, milk and sugar to onion mixture in saucepan; stir well. Add cheese and ham. Simmer over low heat 30 minutes, stirring frequently.