How does a reference electrode work in a three electrode system?
The reference electrode lets you control the potential difference so you don't apply too much driving force to the working electrode and end up reducing water etc. No current passes through it.
  


You have the basic idea but if absolutely no current passed through the reference electrode then you couldn't measure any voltage!

The gist is that you can't measure the "voltage" of a single electrode. You need a complete cell to get a voltage. The reference electrode is used with a very very low current to measure the voltage of the electrolytic cell formed with the working electrode.