What you say about ethanol is true. However, a heat engine's efficiency is determined by its compression ratio. This is why Diesel engines are more efficient than gasoline engines; Diesels run far higher compression ratios. E85 allows much higher compression ratios than straight gasoline, therefore, an engine that runs on E85 can be made to return similar mileage to that of a comparable gasoline engine despite the lower specific energy content of E85.

The problem is that flex fuel engines of today are not optimised to run on E85. They are optimised to run on gasoline. The only difference between flex fuel engines and standard gasoline engines is that the flex fuel engines have components, like fuel lines and injectors, made of materials that resist ethanol's corrosiveness.

So, how does one design an engine that is optimised to run on gasoline AND E85. Well, you can't, because that would require an engine with variable compression ratios. Saab tried that. It didn't work.

However, you CAN get close with modern electronics, direct injection and a variable geometry supercharger driven by an electric motor. Detection equipment would tell the ECU what kind of fuel is being used. The ECU would then optimise the supercharger's boost level depending on RPM, fuel type, barometric air pressure, etc.

Such a system would be very expensive to build right now, but I bet in the not-too-distant future, with biofuels growing in popularity, we will see something similar.