Remove peel from three lemons using a vegetable peeler, avoiding white pith. Combine peels and sugar in a 3-quart bowl; muddle. Let stand 1 hour.
Squeeze all 5 lemons through a strainer into a bowl to extract 3/4 cup juice. Stir juice into sugar mixture. Add liqueur, port, and sparkling water; stir gently. Carefully slide in ice block or cubes. Chill 20 minutes. Grate one-third of nutmeg seed over punch. Garnish with lemon slices, if desired.
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