From Muppet Wiki

The Fraggle Pond is located in the Great Hall of Fraggle Rock and directly below the well in the Gorgs' Garden. It serves as a public swimming pool, and is the location of Red's many swimming lessons and diving exhibitions.

Fed by Doc's plumbing, it empties every day when Pa Gorg takes a bath, whereupon the Pipebangers (led by Archbanger Fraggle) bang on Doc's pipes, causing him to turn on more water and refill the pond.

According to a sketch seen in the bonus features of the Fraggle Rock: Complete First Season DVD, the pond feeds an underground river which leads to Doc's town's water supply. The Doozers have built a hydroelectric plant to harness the river's energy.

Red Fraggle's job is to "clean" the Fraggle Pond (by diving and swimming in it).