This is a well known attack and has been for a while. There are established domain suffixes which block registration for 'wpad' (as well as a few other domains) for exactly this reason. Which is only a partial mitigation in a world where MITM is a potential attack vector.

I have domains which receive a steady stream of 'wpad.$domain' queries from machines which have nothing to do with me. I don't know who owns the machines. I also don't think anyone would notice if I decided to actually provide them with the proxy service they keep requesting from my infrastructure.