drilling jets is always bad. I have a set of jet drills from a few manuafactures. they never do a job as well as the correct sized jet. Best to buy the right thing. Yes e85 will let you run higher compression and not knock.
You can add a lot of hp to an engine by rasing the compression level but just adding e85 to an engine that already has high compression and the cam to match will not make much of a difference. It might even lower the power you would get. Usally the gain is with adding compression and larger cam to make it run right on the new fuel.
If you use the right cam and change the compression to match while keeping the DCR at the same level you can add hp in buckets. But this does not work well above 10:1.