"This post is about a recent scenario where a TMG Administrator was receiving complains that some workstations that were using TMG as proxy were failing to run Windows Update. The interesting part of this issue was that only some workstations were having such problem and only if they were using "Automatic Detection" settings (which use WPAD). But all other workstations were using the same setting and were working just fine," said Microsoft.
Solution: In order to fix this it was necessary to change the entry on the Alternate Forefront TMG field within TMG console to be as shown below:
Once this change was done, the WPAD file changed to have the following entry on the backup route: